Investing Options in Indonesia

by: World Market Pulse

Asia is home to several emerging and globalizing powers, including India and China but one nation that stands out but is not largely covered in the business media is Indonesia. Little is known about Indonesia in the investing circles despite being a country made up of some 17,000 islands, which is now the 4th most populous nation in the world. One striking feature that highlights Indonesia's growth in recent years is the fact that the country has managed to avoid recession during the global downturn, unlike some of its more export-reliant neighbors. Over the last decade, Indonesia has emerged as a vibrant and plural democracy. Its economy is buoyant and a new sense of confidence is evident both within its political leadership as well as its growing civil society. Indonesia is the largest Muslim country in the world, but the Islam practiced by the vast majority of its people is liberal, tolerant and accommodative.

  • The International Monetary Fund (IMF) projects Indonesia’s economy will expand 6% this year. The Chairman of Indonesia’s Investment Coordinating Board estimates growth of between 6% to 7%.
  • The nation’s shares have climbed 12 percent this year and are Asia’s best performers barring Mongolia and Bangladesh, as foreign funds increased purchases after the central bank raised its growth forecast and Standard & Poor’s upgraded the nation’s sovereign debt ratings.
  • Foreign investors moved more funds to Indonesian stocks in March, buying a net 4.92 trillion rupiah ($543 million) of shares after selling 1.58 trillion rupiah in the first two months this year, according to data from the Jakarta stock exchange.
  • The Indonesian rupiah has risen 3.6 percent this year, the second-best-performing currency in Asia, according to data compiled by Bloomberg. A strong rupiah and low inflation have helped the central bank keep its key interest rate at a record low of 6.5 percent to support Southeast Asia’s biggest economy.
  • Indonesia's stock market index, the Jakarta Composite Index, broke its record high earlier this week as it reached 3013.40 points bringing its total gains this year to 19 %, the most among Asia’s 10 largest markets.

Indonesia has managed to avoid recession during the global downturn, unlike some of its more export-reliant neighbors. Both Singapore and Hong Kong are in recession and Malaysia and Thailand are likely slipping into a recession, too, analysts say.

ETFs Investing In Indonesia:

1: The Market Vectors Indonesia (NYSEARCA:IDX) Fund: The Index provides exposure to publicly traded companies that are domiciled and primarily listed in Indonesia, or that generate at least 50% of their revenues in Indonesia. The fund has more than doubled since its launch, outpacing the S&P 500 and outperforming BRIC countries. IDX consists of the 28 securities included in the Market Vectors Indonesia Index, a benchmark that tracks the performance of companies that are based in or generate at least half of their revenues from Indonesia. IDX charges an expense ratio of 0.71%. The IDX is much more focused on energy and commodities that are rallying globally as the U.S. dollar falls and inflation signals begin to sound.

IDX Top Ten Holdings

1. PT Astra International TBK: 8.80%
2. PT Bank Central Asia TBK: 6.80%
3. P.T. Telekomunikasi Indonesia Tbk. ADR (NYSE:TLK): 6.75%
4. PT Bank Rakyat Indonesia TBK: 6.06%
5. PT Perusahaan Gas Negara (Persero) TBK: 5.72%
6. PT Bumi Resources TBK: 5.57%
7. PT Bank Mandiri (Persero) TBK: 5.57%
8. Adaro Energy Tbk: 4.82%
9. PT Indocement Tunggal Prakarsa TBK: 4.72%
10. PT United Tractors TBK: 4.66%

% Assets In Top 10: 59.46%
Total Holdings: 29
Issuer: Van Eck
Expense Ratio: 0.68%

IDX Sector Breakdown

Sector Percentage

Financials 25.23%

Industrial Materials 20.03%

Consumer Goods 14.71%

Energy 13.72%

Consumer Services 8.80%

Telecom 8.79%

Utilities 5.72%

Health Care 1.79%

2: The other fund for investing in Indonesia is a closed-end fund, Aberdeen Indonesia Fund (NYSEMKT:IF), whose principal investment objective is capital appreciation through investing primarily in equity and debt securities of Indonesian companies. Its secondary objective is current income, which is to be derived primarily from dividends and interest on Indonesian securities.

Market cap $99.58M
Average volume 43,075

As of May 31, 2010, the portfolio was invested as follows:

Portfolio Composition Percent of Net Assets

Consumer, Cyclical 24.1

Consumer, Non-Cyclical 23.6

Financials 18.8

Industrials 13.2

Communications 10.2

Basic Materials 4.0

Utilities 3.9

Energy 1.4

Cash 0.8

The Fund's ten largest equity holdings as of May 31, 2010, representing 68.3% of net assets, were:

Stock Percent of Net Assets

Unilever Indonesia Tbk PT 12.2

Astra International Tbk PT 10.0

Holcim Indonesia Tbk PT 7.9

Bank OCBC NISP Tbk PT 7.3

Telekomunikasi Tbk PT 7.2

Bank Permata Tbk 5.4

Ace Hardware Indonesia 4.9

United Tractors Tbk PT 4.7

Jardine Cycle and Carriage Limited 4.6

Multi Bintang Indonesia Tbk PT 4.1

3: iShares MSCI Indonesia Investable Market Index Fund (NYSEARCA:EIDO): The fund incepted in May 2010 is designed to track a free-float adjusted market capitalization weighted index from MSCI representing the top 99% of equities by market capitalization listed on stock exchanges in Indonesia. The fund has an expense ratio of 0.65%.

EIDO Top Ten Holdings

1. Astra International Inc: 13.26%
2. Telekomunikasi Tbk Pt: 10.40%
3. Bank Central Asia Pt: 9.99%
4. Bank Rakyat Indonesia: 7.02%
5. Bank Mandiri: 4.94%
6. Perusahaan Gas Negara Pt: 4.70%
7. Bumi Resources Tbk Pt: 3.93%
8. United Tractors Tbk Pt: 3.86%
9. Unilever Indonesia: 3.58%
10. Semen Gresik (Perserd) Pt: 3.44%

% Assets In Top 10: 65.14%
Total Holdings: 59

EIDO Country Breakdown

Country Percentage
Indonesia 67.75%
Turkey 19.11%
Spain 4.94%
Thailand 2.17%
Others 6.03%

Major Indonesian Companies Listed on NYSE:

1: TLK PTTelekom Indonesia (NYSE TLK): PT Telekomunikasi Indonesia Tbk ((TELKOM)) is the largest full information and communications (InfoComm) service and network provider in Indonesia.

Market cap: $17.66B
Average volume: 286,494
P/E ratio: 13.92

2: PT Indosat Tbk (ADR) (NYSE:IIT): PT Indosat Tbk is an integrated Indonesian telecommunications network and service provider. The Company provides a complement of national and international telecommunications services in Indonesia.

Mkt cap 2.95B
Vol / Avg. 4,600.00/14,000.00
P/E 15.79
EPS 1.72

The Indonesian Stock Exchange:

The Indonesian stock exchange was created after the Jakarta Stock Exchange merged with the Surabaya Stock Exchange in 2007. Before that, the Jakarta stock exchange, which was based in Jakarta, was the main stock exchange in Indonesia.

Two of the main indices available in the Indonesian stock exchange are the JSX Composite and the Jakarta Islamic Index. The JII or the Jakarta Islamic index tracks 30 corporate stocks and is a measure of the market activities based on the Islamic Sharia.

Investing in Indonesia can be fairly volatile--the three-year standard deviation for Indonesia equities is about 50% to 60% higher than that of the S&P 500. After falling 51% in 2008, the Indonesia stock market returned 89% in 2009.

Largest Companies Of Indonesia Listed In Jakarta Stock Exchange

Energy Sector

Perusahaan Listrik Negara
Central Asia Petroleum Ltd

Wood And Paper Industry

Asia Pulp & Paper
Cipta Mebelindo Lestari PT

Telecom Sector

PT Telekomunikasi Indonesia
Bayan Telecommunications

Metals And Mining

Aneka Tambang PT

Automobile Industry


Banking Sector

Bank Central Asia
Bank Dagang Nasional
Bank International Indonesia
Bank Mandiri
Bank Rakyat

Cleaning Services

Calmic Indonesia


Tri Polyta Indonesia Tbk

Tobacco Industy

Gudang Garam tbk

Roadblocks In The Indonesian Growth Story

The main obstacles for further development in Indonesia include deficiencies in basic infrastructure as well as health care and primary education, as highlighted by the Global Competitiveness Index. Furthermore, the country is limited in terms of capital access, due to its macroeconomic environment. Corruption is perceived to be very high, as evidenced by Indonesia’s performance in Transparency International’s Corruption Perceptions Index.

Some of the major problems in Indonesia today are:

  • Indonesia remains prone to sectarian and ethnic violence

  • More than 15% of Indonesians live below the poverty line

  • Infrastructure is poor, if not non-existent

Trade regulations, on the other hand, are less restrictive although the country does impose protective tariffs. The tax regime in Indonesia is welcoming towards investment, both domestic and foreign, and the country has a well-established bankruptcy law. Indonesia has signed and ratified the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States. Corruption is extensive and of concern to investors, reflected in Indonesia’s ranking of 143rd out of 180 countries in Transparency International’s 2007 Corruption Perceptions Index.

Indonesia Outlook 2010 And Beyond:

Asia is believed to be the source of world economic growth in the future. Led by China, the East Asian economy is projected to contribute to three quarters of 2.5 percent of world economic growth in 2010. Although its not just India and China in the Asian growth story. With a wealth of natural resources including copper, gold and coal Indonesia today is becoming an increasingly attractive investment market. With growth rates rising exponentially in China, its appetite for commodities also makes Indonesia - with its close proximity and abundance of natural resources - an ideal partner. Indonesia today is reaping the rewards of good economic policy and responsible debt management, boasting a 4.5 percent growth rate last year and expected to grow by 5.5-6 percent in 2010

Since ASEAN was founded in 1967, Indonesia has always been playing important role in ASEAN. Private consumption accounts for about two-thirds of Indonesia's GDP. Indonesia is also making real efforts to increase accountability in its energy and resources sector by moving to become a candidate country in the Extractive Industries Transparency Initiative (EITI).

Indonesia needs at least $140 billion in investment over the next five years to upgrade infrastructure and meet President Yudhoyono’s goal of 6 - 7 percent annual growth. Two-thirds of that funding will have to come from foreign investment. An enormous market size, young work force, growing economy, and political stability, Indonesia is dressing up for foreign investors in the times to come.

Indonesia Stock Bubble Formation?

While the Indonesia markets surge attracting foreign investors to the country, a recent study conducted by Indonesia's central bank’s economic research and monetary policy division is not very bullish on the Indonesia markets in the long run.

“The actual stock price now is actually exceeding the fundamental value,” Perry Warjiyo, who was a member of the International Monetary Fund’s executive board before taking his current post in July 2009, said in an interview in Jakarta. “Whatever methodology we use‚“ shows an excess valuation, he said, citing Bank Indonesia studies over recent months.

Foreign investors are snapping up Indonesia’s stocks and bonds. They bought a net 4.9 trillion rupiah ($541 million) of shares in March after selling 1.6 trillion rupiah in the first two months of this year, according to data from the Jakarta stock exchange. Foreign holdings of Indonesian bonds rose to 133.7 trillion rupiah as of April 6, up from 108 trillion rupiah at the end 2009, according to Finance Ministry data.

It's important to note that Bank Indonesia board members last year discussed the risks posed by an influx of foreign funds, and the bank studied the feasibility of imposing capital controls.

Whatever might be the case, its quite clear that Indonesia is one of the most promising emerging markets not only in Asia but in the whole world. The Indonesian market or index is one where with the exception of May 10, overall trends since March 2009 have been steady and strong.

Disclosure: QQQQ, EEM