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After showing some signs of weakness late in 2010, Indonesia-specific ETFs regained some solid footing to close the year on an upbeat note and when the dust settled, there was no getting around the fact 2010 was a great year to be long the world's fourth-largest country by population.
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The iShares MSCI Indonesia Investable Market Index Fund (NYSE: EIDO), the newer of the two U.S.-listed Indonesia ETFs, is up more than 22% in the past six months while the Market Vectors Indonesia ETF (NYSE: IDX), the king of Indonesia ETFs is up 23.5% in that time.
The first trading week of the new year has the potential to be a big one for both EIDO and IDX as Indonesia's central bank meets tomorrow and what Bank Indonesia does to combat inflation will make headlines in the emerging markets.
The reference rate will stay at the 6.5 percent level set in August 2009 this month, according to 13 of 15 economists surveyed by Bloomberg News. Not surprising given that Indonesia is the only country in the region to not raise rates to fight inflation...yet.
"Yet" is the operative word because Bank Indonesia may not be able to ignore the specter of inflation much longer.
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Core inflation was down modestly in December from November, but consumer prices jumped almost 7% last month, surpassing the estimate of 6.71%, Bloomberg reported.
While Indonesia has gone the way of China in terms of requiring banks to bolster capital reserves, it may need to take the copy-cat act a bit further and raise rates.
Short-term pain for EIDO and IDX in the form a rate hike could create buying opportunities in both funds. After all, with a robust GDP forecast for this year, Indonesia may notch another year as an emerging markets titan so why let inflation dampen investor enthusiasm for this market?
