Emerging markets: Future success story
Indonesia has been getting a good press, and rightly so. Last year it was the best-performing stockmarket in Asia.
In contrast to declines in many regional bourses, the MSCI Indonesia index recorded a gain, albeit a modest one of roughly 7 per cent, backed by a resilient rupiah.
The country’s return to investment grade status – after more than a decade – is yet another feather in the cap for Southeast Asia’s biggest economy. Coming at a time when the creditworthiness of developed nations is being revised downwards, its sovereign credit rating upgrade has drawn attention to the country’s economic resilience.
Indonesia fared remarkably well during the global slump of 2008-09, largely because exports make up only about a third of its GDP. For the same reason its economy should weather this year’s global slowdown better than its more trade-dependent neighbours. The country’s GDP is still expected to grow by 6.3 per cent this year, just slightly slower than the estimated 6.5 per cent in 2011. Inflation, too, has fallen within the central bank’s internal target of 3.5-5.5 per cent. Interest rates are at a record low after two cuts late last year and should help underpin domestic demand.
Indonesia is also at the early stages of growth. Banking institutions are being developed. People are setting up bank accounts and taking up mortgages. A consumer boom is under way. According to the World Bank, the country’s middle class is one of the
fastest-growing among emerging economies. Indonesia, in other words, is at that phase of dynamic development where investors who identify the right companies could be rewarded handsomely over the longer term.
We have quite decent exposure to Indonesia’s consumer sector. We own one of the country’s strongest consumer stocks, Unilever Indonesia. This local subsidiary of the eponymous global giant has a leading market share in several products across the home and personal care segment as well as the food and ice cream segment – goods that are well positioned to ride on accelerating consumer demand. We also hold Astra International, an exceptionally well managed conglomerate with interests ranging from agribusiness to financial services and the automotive business. We have exposure to a handful of local banks, too, as well as some subsidiaries of multinationals.
For us, Indonesia is really a market that suits our process, which concentrates on doing our homework on the individual companies. The country remains, in many respects, a difficult place for businesses, particularly in comparison with elsewhere in Asia. Its infrastructure is weak. And there are persistent problems of corruption, opaque regulations and legal uncertainties. Investors therefore need to understand not just the dynamics of the underlying business, the balance sheet and its prospects but also the background of the people who control the business. But at least there are signs of change. Macroeconomic policies have been largely prudent. More recently parliament passed land reform legislation, which should boost large-scale infrastructure investment and pave the way for even higher growth.