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Is It Time to Buy Indonesia?

Stocks in this article: IDX EEM EIDO IDXJ

NEW YORK ( TheStreet) -- What in the world is going on in Indonesia? After such a fast decline, does it make sense to buy any of the exchange-traded funds that target the country?

For some background, Indonesia is a resource-rich economy exporting liquified natural gas, rubber and gold among several others. It used to be an oil exporter as well but as the country became wealthier its oil consumption increased and now it imports 400,000-500,000 barrels per day.

For the last few years Indonesian GDP had been running at a 6% annual pace, unemployment has been trending lower, per capita income has been going up, and even life expectancy has been improving dramatically.

The positive story was reflected in equity prices. Coming off the March 2009 low, the Market Vectors Indonesia Equity Index ETF (IDX) rallied 300% in two years, dramatically outperforming the iShares MSCI Emerging Markets ETF (EEM). Since the 2011 high IDX drifted sideways for a while in line with EEM until the start of this year. For the first five months of 2013 IDX went up 19% compared to a 1.5% decline for EEM.

Then Chairman Ben Bernanke's comments on May 22 about the possibility the U.S. Federal Reserve could start reducing its monthly bond purchases hit the domestic market and set off a domino effect in many emerging markets, including Indonesia.

The catalyst at work here is that Indonesia, along with many other emerging countries, have seen capital flow in as investors who normally invest in U.S. assets were forced to seek higher yields elsewhere. Indonesia has benefitted not only in its equity and fixed income markets but also foreign direct investment into the country.

It has been the emerging countries that most benefited from foreign direct investment that have been hit hardest and are perceived to be most vulnerable to the unwinding of quantitative easing in the U.S.

When U.S. interest rates eventually do normalize, investing in Indonesia might be less attractive. For now there has only been a vague hint of normalization and IDX has gone down 34% in just three months.

In addition to IDX, investors can access Indonesia through the iShares MSCI Indonesia ETF (EIDO) and the Market Vectors Indonesia Small Cap ETF (IDXJ). IDX and EIDO offer essentially the same large cap exposure and have traded in lock step since the second to market EIDO started trading in 2010.

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