Joe Kunkle's  Instablog

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).

Earlier today in the Jakarta Post, it was reported 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 interests 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 is also has the third largest amount of coal reserves in the world, ranks 1st in tin production, and has significant gold, silver, copper, and nickel deposits.

With the 4th 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 faovrable 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 attactive 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