Indonesia was a stellar stock market since the depths of the global financial crisis, rising over 300% from its 2008 lows until May 2013.
Historically thought of as a commodity dependent economy, held back by red tape and other restrictions, investors have warmed to the domestic demand opportunity offered by a large, young population and the country’s increasing appeal as a more reform-oriented foreign direct investment (FDI) destination.
The globe’s fourth most populous country, it is adding to its 250 million people by around 3 million per annum and the median age is only 28 years, compared to 40 for the UK.
Since last May, when the US Federal Reserve first suggested it would start to reduce the rate of monetary expansion, investors have become concerned about the impact this would have on those emerging markets that combined a budget deficit with a weak current account.
This group has been dubbed the Fragile Five.
Indonesia was included, not because it was particularly stretched by these measures, but because the current account swung from surpluses over the last few years to a deficit of close to 4% of GDP.
Its currency, the rupiah, has fallen from 8500 to the US Dollar to over 12,000 since the middle of 2011, a decline of 30%, the bulk of which happened in the last eight months.
Encouragingly for Indonesia, the market now seems to have acknowledged that FDI is one of the best ways to finance a current account deficit and has also recognised that the trade account is showing signs of improvement, with trade surpluses in October and November, inflation is falling and the rupiah stabilising even while some other emerging currencies have continued to weaken.
Foreign direct investment rose last year to a record $28.6 billion and is set to rise further.
The share of this coming from manufacturing has risen from 20% in 2010 to over 50% last year.
Growing sectors have included cars, with Honda and Nissan both committed to new investments, and electronics. An improved regulatory environment has made the country more attractive for investment in areas such as power and pharmaceuticals.
Among our preferred investments in Indonesia is AKR, a logistics and infrastructure business.
Key areas include fuel distribution and a new port and industrial estate near Surabaya, the nation’s second largest city.
Profits are set to grow rapidly in the coming two years. We also invest in Bank Central Asia, the highest quality bank in the country with a return on equity of around 25%.
Finally, we like Malindo Foods, a chicken producer whose profits are set to double in the next two years.
In the short term the market may continue to be affected by global factors.
However, the sharp outperformance of Indonesian stocks so far this year suggests that investors are looking beyond the immediate risks. Domestic demand is likely to be weak in the coming months, but, as the economy goes through the process of rebalancing, the longer term outlook for Indonesian stocks is encouraging.
According to Lipper, the fund returned 1.4% in 2013 versus a -4.1% loss in the benchmark