While the BRICs have stolen headlines, Indonesia over the past few years has significantly outperformed them. In fact, it was the only emerging market to outperform the S&P 500 (SPY) in 2011. Since January 2010, The Jakarta Index (IDX) is up 43%, outperforming the S&P 500 by 16%, China by 54%, and Brazil by 53%.
Can Indonesian markets continue their run of success for the rest of 2012 and beyond? Indonesia should continue to be the leading country for growth because of its potentially high consumer base, a growing economy driven by manufacturing, construction, and tourism, and increasing political stability.
At 237.6 million people, Indonesia has the fourth-largest population in the world of any country. With population growth at a manageable 1.9%, future economic growth can have a more positive effect on standards of living and eventually fuel strong consumer discretionary demand. With a GDP per capita of just $1143.83 ($4400 adjusted for PPP), Indonesia has a low base for growth. Other geopolitical factors that favor the growth an Indonesian consumer society including cheap housing prices held down by ongoing construction and subsidized energy (gas just $2.00 per gallon there) that is available due to Indonesia's status as a net exporter of oil and natural gas.
Fortunately, the country also has several rising industries to create employment and economic development. Investment from China, housing demand, and tourism have spurred a massive construction boom across the country and the needed demand for infrastructure and a housing shortage make current building levels sustainable. With dramatic rises in Chinese factory worker wages, manufacturing is shifting to Indonesia due to the availability of unskilled labor there at a fraction of the cost of labor in China, Taiwan, Japan, or the U.S. Due to the growing the popularity of destinations such as Bali, Lombok, Bintan, and historical sites in Java and the development of resorts and activities that cater to visitors with higher incomes than backpackers, tourism has become another critical source of Indonesian economic growth.
The main risk when it comes to investing in Indonesia is ethnic tension. The country has a strong Muslim majority, but has several religious and ethnic minorities that have little cultural and political ties to the Javanese-run government before the nation's independence in 1949. Terrorists attacks have occurred, but compared with other Islamic nations, the Indonesian state is more secular and peaceful than the Middle East and North Africa. My one other concern with Indonesia is its bad history with inflation. The rupiah has gone through several major debasements in its history and further intervention to hold it down can result in inflationary consequences.
Unfortunately like many other non-BRIC emerging markets, exchange listed Indonesian securities are restricted to three ETFs, a closed-end fund (Aberdeen Indonesia Fund (IF), and two telecom companies: Indosat (IIT) and Persero Telecom (TLK). These telecom companies are not that great investments as 70% of Indonesians under 30 already have cell phones and competition is stiff. However, index ETFs such as Market Vectors Indonesia Index ETF (IDX) and the recently released Market Vectors Indonesia Small Cap Fund (IDXJ) are good investments to capture Indonesia's growth.
My long-term fundamental outlook on Indonesia is bullish due to its low base for growth, relatively low correlation either the Chinese or Western economies, and favorable economic developments that will eventually lead to a strong consumer society. As for buying the IDX, I would wait until the index breaks it $30 resistance or if a significant pullback takes place.