The term BRIC was coined to refer to Brazil, Russia, India and China in 2001. Over a decade later, the big four are still powerhouses, but — especially in the case of China — they’ve matured significantly as investment destinations. So it’s no surprise that a new group of emerging markets have begun to fill their shoes in investors’ hopes and dreams. The members of this new group vary, but one very common member is the Pacific archipelago nation of Indonesia. While China has been mentioned in almost every issue of the Investment Digest over the last few years (and India in about two-thirds of them), Indonesia has made it into merely 15 issues. Today’s recommendation is an ETF, recommended by international-investing specialist Global Investment Strategist, that offers broad exposure to the promising country.
“Today’s powerful earthquake 200 miles off the coast of the Indonesian island of Sumatra reminded the world that the country sits on the edges of the Pacific, Eurasian and Australian tectonic plates known as ‘the Pacific ring of fire.’
“Earthquakes, volcanic eruptions and tsunamis always have been the major unknowns for investors in Indonesia. That said, this nation is shaping up to become the next ‘I’ in the BRIC acronym, joining Brazil, Russia, India and China as an emerging powerhouse.
“Indonesia has a huge population of nearly 240 million, with a median age of 28. The country has the largest economy in Southeast Asia and has enjoyed strong economic growth for almost a decade. For the last five years, gross domestic product (GDP) growth averaged about 6%, based mainly on consumption and infrastructure investment (see chart, below).
“Foreign direct investment (FDI) has been a big contributor to GDP in recent years, rising from USD2.6 billion in 2009 to USD20 billion in 2011. Last year, exports surpassed government projections and increased by 29% to USD203.6 billion.
“The Indonesian stock market has been a relative underperformer this year among its Asian peers. This isn’t surprising, because the market has been a huge outperformer in eight of the past ten years and cheaper markets have been trying to catch up.
“Indonesia’s Parliament recently shot down the ruling government’s proposal to raise subsidized fuel prices by a third. A deal was struck whereby the government was given the authority to raise prices if the country’s benchmark oil crude price averages 15% above its target of USD105 over six months.
“Given that the oil benchmark is very close to this target, the planned price hike only has been postponed for a month or so. When it kicks in, it’s bound to boost inflation and perhaps trigger a stock market pullback.
“That said, the government is projecting inflation at only around 6.8% for the year, not extremely high given the economy’s growth rate and previous periods when inflation surpassed 10% and at times even reached 20%. Moreover, the markets have been warned and Indonesia still boasts some of the lowest gasoline prices in the region. Infrastructure spending also is in full swing, providing a cushion for any setbacks.
“Long-belated infrastructure investment is an important driver of the Indonesian economy. The latest government budget passed by Parliament pumps an extra USD2.7 billion in spending for roads, bridges and other fixed capital investments in six provinces in eastern Indonesia. The Jakarta administration also is in the process of awarding contracts for the construction of the first Mass Rapid Transit line that will be 111 kilometers long and cost USD1.5 billion.
“That’s why any dip in the Indonesian market related to the recent earthquake or inflation fears is a buying opportunity. To be sure, the market isn’t one of the cheapest in the region but its growth potential is strong, with an estimated return on equity of above 20 percent. ... To play the broader market, ETFs are the only liquid option for individual investors.
“We recommend the iShares MSCI Indonesia Investable Market Index Fund (EIDO), which offers exposure to banks and key industrial, materials and energy companies that otherwise would be almost impossible for investors to buy. A new addition to the model portfolio, this ETF is a buy up to USD35.”
- Yiannis G. Mostrous, Global Investment Strategist, April 11, 2012