“Indonesia is the next big growth story in Asia, after India and China,” says Fauzi Ichsan of Standard Chartered. No wonder, then, that the Jakarta Composite Index has surged to a new record above 3,500, marking a 50% rise this year. That’s after jumping by 86% in 2009. Foreign investors “have been pouring into Jakarta stocks and bonds all year”, says Assif Shameen in Barron’s.
It’s certainly a compelling story. Indonesia dodged recession during the credit crunch, shielded by its large domestic market. While most of Asia is export-dependent, consumption accounts for 60% of GDP in Indonesia. A healthy increase in consumer spending underpinned GDP growth of 6.2% in the second quarter.
The country also boasts a healthy financial sector, large reserves of natural resources and a stable political environment, says Seekingalpha.com. Its young, 240 million-strong population also bodes well for the long term. Last month, Indonesia was the third biggest mover in the World Economic Forum’s 2010-2011 Global Competitiveness Index rankings, jumping ten places to 44th. A recent decline in inflation has also encouraged investors, says Anthony Deutsch on FT.com. It dipped to 5.8% last month, compared to 6.4% in August. That is likely to delay interest-rate hikes until next year.
Stock valuations are now historically high. Price/earnings ratios have climbed to almost 14 times next year’s earnings. However, with earnings set to expand by 25%, this is not outlandish, says CLSA’s Nick Cashmore. So the long-term outlook is encouraging, as Cris Heaton notes in MoneyWeek Asia – but it is likely to be a bumpy ride.
One potential problem is that all the money heading into stocks, which could well be supplemented by more quantitative easing, could blow up a bubble in the next few months, fears Edwin Sinaga of Finan Corpindo Nusa. That would make the market all the more vulnerable to a change in sentiment. In 2008, the market slumped by 50% as investors fled.
The US-listed Aberdeen Indonesia Fund is currently on a discount of 2% to its net asset value. Two ETFs worth a look are the Van Eck Market Vectors Indonesia (US: IDX) and Deutsche Bank’s x-trackers MSCI Indonesia (LSE: XMID).