Indonesia Offers Value, But EIDO May Not Be The Best Vehicle

Indonesian equities are currently seen as attractively valued following a decade of underperformance in USD terms, presenting a potential opportunity amidst expensive developed markets. However, the iShares MSCI Indonesia ETF (EIDO), while offering convenient access, is highly concentrated and includes a mix of strong companies alongside richly valued or unprofitable names. Foreign investors also face a significant risk from the long-term depreciation of the Indonesian Rupiah, suggesting that an active, bottom-up investment approach focused on value and free cash flow may yield superior results compared to passive ETF exposure.

Analysis

Indonesian equities are presented as an attractive value proposition following a decade of underperformance in USD terms, offering a potential alternative to highly-valued developed markets. However, the analysis of the iShares MSCI Indonesia ETF (EIDO) reveals significant structural issues that may undermine its utility as an investment vehicle. The ETF is characterized by high concentration and a portfolio composition that includes not only attractively valued companies but also those with triple-digit P/E ratios and negative cash flow, diluting the pure-play value exposure. Furthermore, a critical macroeconomic headwind is the Indonesian Rupiah's history of long-term depreciation, which poses a substantial risk to foreign investors by potentially offsetting equity gains. The overall assessment suggests that while the underlying market holds promise, passive exposure through EIDO is suboptimal, and a more discerning, active bottom-up approach focused on value and free cash flow may be required to achieve superior results.

Key Decisions for Investors

• Investors should exercise caution with the iShares MSCI Indonesia ETF (EIDO) as a proxy for Indonesian value, given its high concentration and inclusion of richly valued or unprofitable companies.
• Consider an active, bottom-up stock-picking strategy focusing on companies with low valuations and strong free cash flow to more effectively capitalize on the Indonesian market's potential.
• Factor in and actively monitor the currency risk from the Indonesian Rupiah's long-term depreciation, which could significantly erode returns for USD-based investors.