Indonesia: A Must-Own Emerging Market

I recently came across a new offering from Market Vector Funds, the Indonesia Index (IDX), and after doing some research I began to really like the prospects with the emerging economy. Portfolios looking to diversify some holdings into an emerging market will have a tough time finding a better place to invest for the future.

The IDX sector breakdown is as follows: 29% Financials, 20% Energy, 17% Materials, 12% Consumer Staples, 7% Consumer Discretionary, 6% Telecom, 6% Utility, and 3% Industrials. More than 50% of the companies are considered mid-cap, with 41.8% large cap. The PE Ratio for the fund is around 13, which is extremely cheap considering the growth prospects as compared to comparable industries in other countries.

Some of the largest components in the IDX include Bumi Resources, PT Astra, Bank Central Asia, Telecom Indonesia, Perusahaan Gas Negara, Bank Madiri, and Adaro Energy.

Launched in January, the IDX has climbed 60% in 5 months, but still has room to rise when considering the Indonesian economic growth prospects combined with valuation and an upcoming political event that could be a favorable catalyst for the economy (think India, which gained 17% in one day on an election win today).

It was reported in in the Jakarta Post, that Indonesian Presidential candidate Jusuf Kalla expects economic growth to accelerate to 8% per annum by 2011 if he wins the upcoming election, which would be competitive with the Chinese economy that is starting to slow with the rest of the World. Kalla also plans a progressive tax system and the construction of more coal-powered plants, which provides clues to individual investment ideas in Indonesia.

Indonesia is rich with minerals, metals, oil and has a budding tourism industry. Indonesia is blowing away other Southeast Asian economies in GDP growth due to less reliance on exports, low interest rates and surging consumer confidence that creates the formula for an economy set to succeed for years to come. Recent agreements with Vietnam on mineral and energy ties is also bullish for the Indonesian markets.

Indonesia has shown resillience and has swiftly recovered from the Southeast Asian crisis of the late 1990's through sound fiscal and monetary policies combined with rebuilding the country's infrastructure. Since 2003, Government debt as a percentage of GDP has almost been halved to around 30%, while inflation has settled in around 6%, and private investment has risen nearly 20%. The ongoing fiscal policy initiatives combined with the liberalization of the economy will make Indonesia a sound investment for years to come.

Indonesia oil production has declined in recent years due to aging reserves and it formally exited OPEC in 2008, becoming an oil importer, but it ranks second in the world in liquefied natural gas exports and is less reliant on oil exports than in recent years. It also has the third largest amount of coal reserves in the world, ranks first in tin production, and has significant gold, silver, copper, and nickel deposits.

With the fourth highest population in the World, around 240 million, private consumption is continuously expanding. Also, being made of 17,000+ islands makes it ideal for Agriculture, which the world will always have a need for, and it is a top exporter of palm oil (alternative fuel prospects), rubber, wood, tobacco, cocoa, coffee, tea, spices and shrimp.

There are also encouraging signs of foreign investment coming in, as more favorable laws are passed, and reforms promote the investment process, as foreign direct investment jumped 150% from 2006 to 2007.

The Indonesian (IDX) Fund will come with some added volatility (1.8 Beta and 36.45% annualized volatility) and may not be for the safer crowd, but offers possible huge returns, and has the lowest correlation of all economies to the developed markets that make it an attractive addition to any portfolio.

I recently highlighted Indonesian Telecom (TLK) as a great investment idea for an individual stock in the region, but for traders with access to foreign markets, many of the mineral and coal plays trade at a valuation much lower than US counterparts, and offer attractive reward/risk scenarios.

Disclosure: Holdings in IDX

Comments

[Delbert Man...:]

I agree. I am an Indonesian stock trader. My portfolio has increased 70% since February 2009. My top holdings are Bumi Resources (bloomberg code: BUMI:IJ), Jasa marga (bloomberg code: JSMR:IJ), London Sumatra Plantation (bloomberg code: LSIP:IJ), semen gresik (bloomberg code: SMGR:IJ) and Adaro Energy (ADRO:IJ). Indonesia has a lot of good mining companies and also agriculture companies. Those two sectors and infrasructure are my favorite sectors in Indonesia.

May 19 08:47 AM

[Albert Meyer:]

Doing due diligence on TLK should turn out to be rewarding exercise over the long-term. TLK needs to be more timely in publishing results.

May 19 09:57 AM

[Eric Peterson:]

I've been investing in IF (Indonesia Fund, a closed end fund) for serveral years. It had a huge drop last year, but has been doing well this year, although not up to the levels it was at last year. It has the advantage that it's trading at about a 10% discount to net asset value. It has the disadvantage that trading volume is fairly light.

May 19 10:29 AM

[robert99:]

Wish I had known about Indonesia's potential five months ago, but better late than never. Added to my watch list; thanks.

May 19 02:23 PM

[The Aft Deck:]

Indonesia was always considered one of the major Asian economy's but slipped from focus in the last few years. Certainly a big and growing market.

May 19 04:21 PM

[socphd71:]

Do any of your predictions change if Yudhoyonu, the incumbent, wins?

May 19 07:42 PM

[aarc:]

Want something else ETF not popular at all?

EWI or Itally.

It has a chart pattern similar to Dow Jones on the monthly. But unlike Dow Jones, Italy is a loan default risk country so not rosy at all on the fundamental side.

However, it provides a yield of more than 10% at current prices per Yahoo Finance. Similar to the REITs; they are in big trouble so they try to entice investors with high yields. Yield will go up as the price goes down. No other country ETF has a better yield to Italy I have seen so far. For long-term hold, the yield alone compounded annually can more than offset the price appreciation potential with no yield of many stocks and indeces - assuming Italy never recovers and it's yield remains the same. (Not possible compounding with the same current yield since the yield will go down as price goes up even if you buy more EWI shares with the cashed-out dividends on current holdings each year. So average compounded yield will deteriorate as the EWI share price goes up.)

Remember the times in the past when investors would be willing to give their left arm for 10% annual yields on risky stocks? This is not as risky as individual stocks that can go bankcrupt and cease to exist.

Consider this for example: Dow Jones averaged less than 9% yield compounded annually since 1932 at a price of $42/share to $14,200/share in 2007. Any investor would kill a dozen geese or two for such an exemplary torrid rally assuming they were able to buy near the bottom of 1932 and sell near the top in 2007. Well, I guess nobody did.

Ideal price target for EWI is $6.49. It is now at $16.82 and more likely will go for $18.21 before the next run down - so wait for the next run down. Who knows, they may actually default on their loans and their stock market will undergo a panic selling much like Iceland. But Iceland was able to survive, at least for now. Iceland went into a one-day market meltdown during the default announcement date and the price rallied back near the open price by the close, if I can remember it right.

I'll start buying at $9.15 if the $18.21 got reached in this 3 months rally. Lower or higher depending on how far the price can go for this "bear rally".

May 20 10:18 AM