BRIC investing strategies tend to focus on the four big emerging markets – Brazil, Russia, India and China. But there is a lot of talk of late that the BRIC funds designation may need an extra “I” — for Indonesia.
Indonesia is now the world’s best-performing market in 2010, building upon a stellar 2009. In fact, the Indonesian economy never entered a recession in 2009, largely because it supplies valuable low-cost natural resources to both China and India, which both weathered the global storm relatively well.
Although Indonesia was one of the worst hit in the 1997 Asian Crisis, a lot has changed since. The economy has seen a rise in investor interest only comparable to perhaps Brazil. Indonesia is the world’s fourth-largest country with a growing population of 225 million.
A lot of the progress is due to the effort of the first administration of President Yudhoyono — significant reforms in the financial sector, tax and customs reforms, as well as capital market development and supervision. The country’s indebtedness has declined steadily because of increasingly robust GDP growth and sound fiscal policies.
We are also seeing this throughout much of Latin America and Asia, where debt-to-GDP ratios are falling, even as they are rising in the developed western world. The developed world is borrowing to maintain its standard of living — a clearly unsustainable policy — while the developing world is behaving in a fiscally responsible manner.
Indonesia is emerging as a domestic demand-driven economy, similar to India and now increasingly China; this was a rarity in Asia not long ago. Domestic consumption makes up two-thirds of the Indonesian economy. And with GDP growth expectations in the 6% to 7% range for 2010, there is a lot to like about Indonesian equities. CLSA Asia Pacific Markets, which came up with the Chindia term, has now come up with Chindonesia — adding Indonesia to the powerful duo. The GDP of the trio has doubled since 2004.
We have only two listed Indonesian ADRs (there are many more that trade OTC, but in illiquid volumes) and one ETF to chose from right now. The Market Vectors Indonesia ETF (NYSE: IDX) is the first and only ETF that focuses exclusively on Indonesia. The ETF includes many of the largest and most liquid stocks domiciled and primarily listed on an exchange in Indonesia, or generating at least 50% of their revenues in the country.
The ETF has only 29 holdings, but they come from a broad array of industries. Financials comprise 25.4%, materials make up 15.7%, consumer discretionary rings in at 12.5%, energy is at 12.5% and consumer staples is 11.6%. Only one of the top-10 holdings — PT Telecom Indonesia (NYSE: TLK) — is listed in the U.S., so this ETF offers a way to invest in the “real Indonesia” that is otherwise inaccessible to most investors.
Now, as for PT Telecom, it is the predominant Indonesian telecom company. The company has posted steady revenue and profit growth over the past five years and currently trades at about 15 times earnings, while yielding 3.4%. However, it is key to remember that dividends are not set in stone in Indonesia (as in many places in the world) and are paid at the discretion of management. The U.S. practice to pay stable dividends in different economic environments exposes many U.S. companies to extra risks — some have to borrow to pay the dividend — which is not in the long-term interest of the business.
The other Indonesian telecom — PT Idosat (NYSE: IIT) — trades at a similar earnings multiple, with a yield of 2.7%. It is a little more than one-fourth the size of TLK and it does grow a little faster. So, if you are looking for a more established company that is likely to pay higher dividends over time, TLK is your choice. If you are looking for a “growthier” investment, it’s IIT.
