Although China, and more recently India, have been popular bets within emerging markets (EM), investment professionals see promise in the third-fastest growing economy in the G20, Indonesia.
According to Maple-Brown Abbott, there are a number of demographic tailwinds for investors in the country, including a young, growing and urbanising population, increasing purchasing power, and an emerging middle class.
“Increasing credit penetration, greater consumer spending and rising investment capital expenditure means there should be significant growth opportunities for local companies to benefit from,” said John Moorhead, head of global emerging markets, and Will Main, head of Asia, at the fund manager.
The International Monetary Fund (IMF) has previously pegged Indonesian GDP growth to sit at an average of 4.9 per over 2024–26, down from 5 per cent, with private consumption anticipated to be the primary driver of growth. In comparison, it predicted growth of 4.6 per cent in China; 6.5 per cent in India; and 1.2 per cent in Australia in 2024.
Previously, Indonesia was considered among the “fragile five” alongside Brazil, India, South Africa, and Turkey, Mr Moorhead and Mr Main noted, and currency weakness and macro-related concerns have historically been headwinds.
“Indonesia’s reliance on foreign capital, large current account deficits and low foreign currency reserves put the country at risk of a significant currency devaluation. Over the past decade the government has introduced important reforms resulting in lower inflation, a budget surplus and an improved trade balance – all contributing to greater economic and currency stability,” they explained.
The fund managers pointed out that, similar to India, Indonesia offers many positive fundamentals such as rising incomes and greater infrastructure spending, while offering cheaper valuations. The Indian market trades at around 23x next year’s earnings, they said, and Indonesia trades at some 14x.
However, the Indonesian equity market can be relatively concentrated, they admitted, with financials making up over 60 per cent of MSCI Indonesia and consumer-related companies making up a further 10 per cent of the market.
This made the banking industry particularly attractive, given relatively benign competition, high profitability and attractive valuations.
“Overall, we have a favourable view on Indonesian equities,” Mr Moorhead and Mr Main explained.
“We continue to look for opportunities to deploy capital in the Indonesian market.”
Witnessing development decades in the making
In February, the Asian country saw more than 200 million eligible voters head to polls in one of the year’s more anticipated general elections, with Defence Minister Prabowo Subianto emerging as the next president elect per recent media reports.
According to Ox Capital’s chief investment officer, Dr Joseph Lai, this indicates how the people “voted for continuation for the same style of leadership”, having enjoyed the last few decades of robust growth and structural reforms.
This included infrastructure development while keeping the fiscal deficit in check and a surge of foreign director investment that bolstered foreign investors’ confidence in the country’s growth prospects.
“Markets went up immediately after the first round of voting, so it was more or less business as usual,” Dr Lai told InvestorDaily.
Among the various initiatives to bolster economic growth, he pinpointed the government’s efforts to make the most of Indonesia’s rich endowment of natural resources, particularly coal, palm oil, and nickel.
In 2023, Indonesia’s exports of thermal coal crossed 413 million metric tonnes for the first 10 months of the year, followed only by Australia and Russia, in a year that saw countries grapple with an energy crisis following the invasion of Ukraine.
Meanwhile, its nickel reserves, the largest in the world, helped lift foreign direct investment to $47 billion as companies set up processing plants onshore. This followed outgoing president Joko Widodo’s decision to ban nickel exports in 2020 to encourage onshore processing.
“Australia and Indonesia are among the best endowed with nickel resources, which are needed for EV batteries,” Dr Lai explained.
“Indonesia is trying to become EV battery making capital of the world and it’s trying to get battery companies to do more model testing onshore. All these islands are turning into huge processing plants.”
Other sectors of promise include banks – with Bank Negara Indonesia among top 10 holdings of the Ox Capital Dynamic Emerging Markets Fund – and consumer discretionary companies, which benefit from the country’s burgeoning middle class.
According to the Lowy Institute, Indonesia has one of the fastest-growing e-commerce markets in the world and is on track to reach $360 billion by 2030.
“Based on my experience in markets, where the economy is absolutely taking off, it’s the big dominant businesses that benefit immeasurably, so the financials and big consumer-related names, typically can do quite well,” Dr Lai said.
The investment executive also observed that, while Indonesia is not as big as the Indian economy or as topical as the Chinese economy, the EM equities space has flown under the radar following the massive attention on the US, specifically the Nasdaq’s, performance.
“In emerging markets right now, valuations are attractive and there are great economic dynamics. Also, we’re seeing the prospects of US dollar coming down and US rates cutting rates, which are usually precursors to EM markets doing better,” he added.
