Speculators And Hit-And-Runs: An Indonesia Investing Reality Check

by: Emerging Market Skeptic

For American investors looking for a way to invest in Indonesia, the next potential addition to the so-called list of BRIC countries, the options are really limited to telco stocks PT Indosat Tbk (IIT) and PT Telekomunikasi Indonesia (NYSE:TLK) which trade as ADRs on the NYSE; Indonesia ETFs like the iSHARES MSCI Indonesia Investable Market Index Fund (NYSEARCA:EIDO), the Market Vectors Indonesia Index ETF (NYSEARCA:IDX) and the Market Vectors Indonesia Small-Cap ETF (NYSEARCA:IDXJ); and closed-end fund Aberdeen Indonesia Fund Inc (NYSEMKT:IF). That's not exactly a big investment selection for world's fourth most populous country and the largest Muslim one, but it's what American investors have to work with. With that in mind, should you even bother to invest in Indonesia and if so, in what?

Indonesia Concerns: Consumer Credit and Local Stock Traders

Let me start by saying that I have recently come back from a three week trip to the Indonesian island of Sumatra with the city of Medan (with a metropolitan population of more than 4.1 million) being Late model cars on the roads of Medan, Indonesiathe biggest surprise as its filled with plenty of newly built McMansions and a traffic jam of motorcycles and late model vehicles (all with wrap-around tinted windows to hide the faces of drivers and their passengers) that are generally nicer and newer than the cars you see on American roads. However and about a minute after I walked out of my hotel right after I arrived, I saw a truck make a left turn in front of one of those late model cars which promptly slammed into it and stalled. And the truck? The truck driver just kept on driving to provide a good example of the casual lawlessness that people in Indonesia face; plus a week later, American flags were being burned in front of the city's US consulate.

Later in the evening, a young local Indochinese friend of mine took me to Sun Plaza - the glitziest shopping mall in town. Besides telling me about the kidnappings and killings of local Chinese (who make up the city's business class) that still occur, he mentioned two important concerns investors in Indonesia should also consider:

  1. Consumer Credit. Like in the States, those motorcycles and late model cars tend to be bought using consumer credit; and if you don't make the payments, the dealer comes and takes the vehicle away.
  2. Stock Speculators. Like many Indochinese, my friend's parents own a shop but many young Indochinese like him don't want to own shops anymore. Instead, they prefer to make money the easy way by trading gold or trading stocks. In fact, I have another young IndochineThe Sun Plaza shopping mall in Medan, Indonesiase friend in Jakarta who is a full time stock trader using his own capital to trade stocks on the Jakarta stock exchange from his home.

I don't know how many Indonesians have bought vehicles on credit nor how many young stock traders there are in the country but I do remember the Asian Financial Crisis (essentially a business and government credit bubble) and our more recent Great Recession that was caused by a giant consumer credit bubble.

Investing in Indonesia Stocks

Those concerns and my Indonesia trip in mind leads me to investing in Indonesia with the rather limited options for US based investors being a handful of:

  • Indonesia ADRs (IIT & TLK)
  • Indonesia ETFs (EIDO, IDX & IDXJ)
  • Indonesia Closed-End Funds

Indonesia ADRs: IIT & TLK

NYSE listed telco stocks PT Indosat Tbk and PT Telekomunikasi Indonesia with the later being the largest telecommunications services company in Indonesia (semi-privatized but still majority state owned) are really an American investor's only options for investing in individual Indonesian stocks.

Much has been written on here already about both PT Indosat Tbk and PT Telekomunikasi Indonesia, but here are my two key caveats for you to consider:

  • Future Growth Will Slow. From my observations, the only Indonesians who don't yet have mobile phones are probably those living in the jungles of Borneo or Papua and don't need them. That means the future growth potential for both PT Indosat Tbk and PT Telekomunikasi Indonesia will be more muted. On the other hand, Indonesia is probably the only place in the world where the release of a new Blackberry can lead to a near riot as what happened late last year in Jakarta. Hence and as Indonesians rise into the middle class, perhaps both PT Indosat Tbk and PT Telekomunikasi Indonesia will be able to sell them more expensive phones and data plans to go with them to keep up their growth rates. Just don't expect anything phenomenal.
  • Unstable Dividends. Dividend investors need to be cautious as while the forward dividend yields on PT Indosat Tbk and PT Telekomunikasi Indonesia (TKL) are a respectable 1.10% and 2.80%, respectively; these stocks generally pay most of their dividends (which varies) as one payment in June or July as its difficult for any emerging market stock to pay a consistent dividend four times a year. That's a major reason why I have not bought PT Telekomunikasi Indonesia despite the fact that I have watched the stock on and off for more than a decade.

PT Indosat Tbk chart

PT Telekomunikasi Indonesia chart

Indonesia ETFs: EIDO, IDX & IDXJ

On the Indonesia ETF front, American investors have three choices: 1) The iSHARES MSCI Indonesia Investable Market Index Fund, 2) The Market Vectors Indonesia Index ETF and 3) The Market Vectors Indonesia Small-Cap ETF.

So what is the difference between The iSHARES MSCI Indonesia Investable Market Index Fund and The Market Vectors Indonesia Index ETF besides any expense ratios and their managers? A quick look at their top 10 holdings as of mid-October reveals the following Indonesia stocks:

The iSHARES MSCI Indonesia Investable Market Index Fund Holdings (October 18, 2012)
Astra International Tbk. (ASII.JK) 14.28%
Bank Central Asia Tbk. (BBCA.JK) 8.61%
Telekomunikasi Indonesia (Persero) (TLKM.JK) 8.37%
Bank Rakyat Indonesia (Persero) (BBRI.JK) 7.38%
Bank Mandiri (Persero) Tbk. (BMRI.JK) 6.48%
Perusahaan Gas Negara (Persero) (PGAS.JK) 4.18%
Semen Gresik (Persero) Tbk. (SMGR.JK) 3.75%
Unilever Indonesia Tbk. (UNVR.JK) 3.41%
United Tractors Tbk. (UNTR.JK) 2.84%
Indocement Tunggal Prakasa Tbk. (INTP.JK) 2.80%

The Market Vectors Indonesia Index ETF Holdings (October 18, 2012)

Astra International Tbk. (ASII.JK) 8.59%
Bank Central Asia Tbk. (BBCA.JK) 7.89%
Telekomunikasi Indonesia (Persero) (TLKM.JK) 6.88%
Bank Rakyat Indonesia (Persero) (BBRI.JK) 6.59%
Bank Mandiri (Persero) Tbk. (BMRI.JK) 6.15%
Perusahaan Gas Negara (Persero) (PGAS.JK) 4.90%
Semen Gresik (Persero) Tbk. (SMGR.JK) 4.51%
Indocement Tunggal Prakasa Tbk. (INTP.JK) 4.20%
Jardine Cycle & Carriage Ltd. (C07.SI) 3.52%
Golden Agri-Resources Ltd. (E5H.SI) 3.38%

And their returns:

iSHARES MSCI Indonesia Investable Market Index Fund chart

Market Vectors Indonesia Index ETF chart

To me, that looks like a wash. So for investors, what might really matter is what ETF fund manager they are more comfortable with, iShares by BlackRock or Van Eck Global, along with any expense ratios and the like.

However, investors need to be more cautious with the Market Vectors Indonesia Small-Cap ETF, which seeks to track the performance of the Market Vectors Indonesia Small-Cap Index, as its average daily volume over the past three months appears to be only around 1,000 shares a day for a net asset value of about $2.3 million as of the middle of October. Likewise, the Market Vectors Indonesia Small-Cap ETF has only been around since March of this year, and I think the only reason Van Eck Global created it was to cash in on any hoopla (or potential hoopla) surrounding investing in Indonesia. In addition, the Market Vectors Indonesia Small-Cap ETF has not exactly been performing well:

Market Vectors Indonesia Small-Cap ETF chart

Indonesia Closed-End Funds: IF

Finally, Aberdeen Asset Management has offered the Aberdeen Indonesia Fund as a closed-end fund since March 1990 - meaning the fund was around before the Asian Financial Crisis in the late 1990s. Hence, it has a considerable track record for investors to review and draw conclusions from.

Merdeka Walk restaurants...

Moreover and at the end of August (according to the latest Aberdeen Indonesia Fund fact sheet), the fund had 25.8% of its assets in Indonesian Consumer Cyclical Stocks, 24.4% in Financials and 21.6% in Consumer Cyclicals while weighs for Utilities, Basic Materials, Energy Communications and Industrials stocks were in the single digits. Hence, the Aberdeen Indonesia Fund is a good play on Indonesia's 250 million or so consumers and its growing middle class (Note: Even if just 10% of Indonesia's population can be considered at least middle class, that's roughly the same population as Malaysia and four-to-five times that of Singapore).

However, just be aware that the Aberdeen Indonesia Fund is relatively concentrated with the following stocks making up two-thirds of its holdings as of the end of August, 2012:

Aberdeen Indonesia Fund Holdings (August 31, 2012)
Unilever Indonesia Tbk. (UNVR.JK) 9.4%
Bank OCBC NISP Tbk. (NISP.JK) 8.2%
Bank Permata Tbk (BNLI.JK) 7.9%
Holcim Indonesia Tbk. (SMCB.JK) 7.5%
Jardine Cycle & Carriage Ltd. (C07.SI) 7.4%
Astra International Tbk. (ASII.JK) 6.1%
Ace Hardware Indonesia Tbk. (ACES.JK) 4.7%
Indo Tambangraya Megah Tbk. (ITMG.JK) 4.7%
M. P. Evans Group PLC (MPE.L) 4.6%
Vale Indonesia Tbk. (INCO.JK) 4.4%

Moreover and as of the middle of October, the Aberdeen Indonesia Fund was trading at a discount of nearly 10% to its net asset value or NAV. However, the Aberdeen Indonesia Fund also has a rather spotty history of paying dividends or distributions over the long-term; and as with all closed-end funds, investors need to be aware that they may actually be receiving a distribution of their initial investment rather than "real" income when dividends or distributions are being made.

Aberdeen Indonesia Fund chart

Investing in Indonesia: Some Final Thoughts

I happen to really like Indonesia as a place to visit and I could easily live there, but I am also not so sure if I'd want to invest a big sum of money in the stock market of a country potentially full of young stock speculators and casual lawlessness like hit-and-run accidents involving vehicles bought on consumer credit. Likewise and when I lived in Manila a few years ago, those with long memories there would sometimes comment about all the new cars on the road and the condos being built - just like during the bubble years before the Asian Financial Crisis hit.

On the other hand, Indonesia is a country with close to 250 million consumers, plenty of natural resources and a growing middle class that makes it hard to ignore. With all of that said and for investors serious about investing in Indonesia, PT Indosat Tbk and PT Telekomunikasi Indonesia are worth considering, but only versus other emerging market telco stocks; either the iSHARES MSCI Indonesia Investable Market Index Fund or the Market Vectors Indonesia Index ETF would be good for ETF investors who want exposure to Indonesia in general, while investing in the Market Vectors Indonesia Small-Cap ETF requires much more caution; and the Aberdeen Indonesia Fund is a potentially good play on all of those Indonesian consumers by investors who prefer to invest in managed or closed-end funds with a track record.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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