Idea of the Week: Indonesia May Emerge as Attractive Asian Alternative to China
When looking for exposure to Asian emerging markets, don’t overlook Indonesia and its turbo-charged growth.
Released: June 13, 2012
Length: 3 Minutes
Watch this 3 minute video to how analysis from Datastream Professional and StarMine earnings show Indonesian forecasts have historically been better than China’s—and may in fact surpass them in the near future.
The last time Indonesian stocks hit the spotlight, it was for all the wrong reasons. It was 1997, and the emerging markets had begun to submerge. Within a year, the country’s GDP had shrunk 13.7% and the plunge in the value of its currency, the rupiah, had driven its public debt levels sharply higher. Soon, what had begun as a financial crisis became a political one as well, as President Suharto was forced to resign amidst violent protests.
Flash forward 15 years, and Indonesia appears to be a stealth success story. While many emerging markets investors have focused their attention on China – the world’s second largest economy and by far its most populous – Indonesia quietly regained its investment-grade debt rating. Indonesia is likely to overtake Turkey this year and the Netherlands, its former colonial master, next year to become the 17th largest national economy in the world by the end of 2013, the International Monetary Fund estimates.
While investors’ eyes have been glued to China, Indonesian stocks have been on a tear, according to the Thomson Reuters Indonesia Index, generating a total return of 370% over the last dozen years, handily outpacing the 80% total return on the Thomson Reuters China index during the same period and dwarfing the 13% gain in the S&P 500. And the data appear to signal that a smaller emerging market nation like Indonesia may actually continue to post better long-term returns than does China, at least in the long haul.
Since June 2000, the Thomson Reuters Indonesia Index provided a 370% total return (blue line), beating the Thomson Reuters China Index’s 80% total return (orange line) and the S&P 500’s 13% total return (grey line).
Of course, that doesn’t mean Indonesia is immune to the economic storms now sweeping through the world’s financial markets. On the contrary, the latest Indonesian export data posts a slightly less upbeat picture than does that of China, as exports began to decline before that of its Asian neighbor. And the makeup of its trading partners isn’t encouraging: Japan is Indonesia’s largest trading partner, accounting for 17% of its exports, while the Eurozone represents another 11% and China a total of 10%. (The United States comes in fourth, with 9.5%.) Needless to say, with the Eurozone in both economic and political turmoil and China cutting interest rates to try to maintain GDP growth at levels consistent with domestic prosperity and stability, Indonesia is heavily exposed to factors beyond its own control.
As we reported recently, StarMine models suggest that it’s too early to start bargain hunting among Chinese stocks given that the Predicted Surprise – the percentage point difference between consensus earnings estimates and StarMine’s SmartEstimate (which places the greatest weight on the most recent forecasts by top-ranked analysts) – now stands at -1.9%. Indonesia also has a negative Predicted Surprise for earnings for the next 12 months, but it is only -0.4%; although still not positive, it’s better than that of China. Moreover, since the beginning of the financial crisis, the Thomson Reuters Indonesia Index lost less ground in the bear market than its Chinese counterpart, and gained more during the rebound that followed.
That’s not to say that investors should jump into Indonesian stocks with both feet, or shun China altogether. But it’s a timely reminder that the other 50% in market capitalization of Emerging Asian economies may offer different risk and return patterns and don’t necessarily move in lockstep with that of China, and shouldn’t be overlooked. Certainly, Indonesian stocks may well end up being an appealing option for investors who, until now, have viewed China as the most logical investment option simply because of its overwhelming size and regional dominance.