This Asian Nation's Stocks Are Up Over 20% YTD

By Prableen Bajpai 

As the world’s largest archipelago with more than 17,500 islands, Indonesia's link to the sea has long meant that trade has played a significant role in its shaping. Historical links to India and China — as well as to the rest of Southeast Asia — also mean that it's well-position near some of the fastest-growing economies in the world. And its population of roughly 250 million people means that it also has significant indigenous demand for goods and services.

Less known about Indonesia is the fact that it was able to weather the 2008 financial crisis better than its neighbors and that its stock market is up over 20% so far in 2014. (For more, see: Make A Play For Asia's Frontier.)

Indonesia, which bore most of the brunt of the 1997 Asian financial crisis, was able to wait out the subprime meltdown of 2008 when many large economies were engulfed by it. The policies put in place by the Indonesian government after the 1997 meltdown provided an effective shield to the economy. Indonesia's subsequent economic performance had economists placing it with India and China as a next power center of Asia. Some even argued that is should be included among the BRIC nations. That didn’t happen, but Jim O’Neill, the former Goldman Sachs economist who coined the acronym, included it in a new acronym for the next wave of emerging economies: MINT countries. (For more, see: The MINTs Could Be The Next Big Thing.)

Vast Natural Resources

Indonesia has been a member of OPEC, and  oil and gas exports were a big part of the country's balance sheet until about a decade back. Rising domestic demand has turned Indonesia into a net oil importer despite being relatively oil-rich (the country suspended its OPEC membership in January 2008). Its huge population and increasing oil consumption has burdened Indonesia with oil import bills and subsidies. The country is also rich in natural resources such as rubber, coffee, tin, copper, gold, nickel, palm products, fish and forestry products. Tourism is gaining popularity and contributes just under $10 billion to the economy.

The Indonesian economy is not seeing the best of times right now. Gross domestic product (GDP) growth moderated to 5.8% in 2013 from an average of 6.3% over the previous three years. Gross domestic product (GDP) grew at 5.1% during the second quarter 2014, which is the economy’s lowest level for almost five years. Economic growth took a hit as a result of a ban on unprocessed mineral exports and a rise in interest rates. The interest rate rise by the central bank was designed to mute domestic demand as inflation rose and to prevent its trade deficit from growing. President-elect Joko Widodo will take office in October 2014 amid high expectations, as he has vowed to revive the economy to a growth rate of at least 7% in order to reduce poverty and boost job creation.

The International Monetary Fund (IMF) expects Indonesia's economy will grow by around 5.4% in 2014 and financial conditions will improve accordingly, though the Asian Development Bank (ADB) projects a slight dip in economic growth in 2014 before picking up again in 2015.

Selected Economic Indicators (%)	2014	2015
GDP Growth	5.7	6.0
Inflation	5.7	4.8
Current Account Balance (a share of GDP)	-2.9	-2.0

Source: Asian Development Outlook 2014 (Asian Development Bank estimates)

Trading Indonesian Stocks

Indonesia Stock Exchange (Bursa Efek Indonesia) is based in Jakarta and was previously known as the Jakarta Stock Exchange until 2007 when it was merged with Surabaya Stock Exchange (BES). Before the merger, the Jakarta Stock Exchange was the main stock exchange in Indonesia. The Indonesian stock markets have had the second-best showing among emerging markets over the past decade. Jakarta Stock Exchange Composite Index (JKSE) is one of the most popular market indices on the IDX. The index is up by around 20% so far in 2014. (For more, see: Don't Ignore These Emerging Markets.)

Annual Returns (%)

2004	44.56
2005	16.24
2006	55.29
2007	52.08
2008	-50.64
2009	86.98
2010	46.13
2011	3.20
2012	12.94
2013	-0.98
2014*	20.23

*YTD to August 2014

Few of the prominent companies across sectors in Indonesia are PT Telekomunikasi Indonesia (TLKM) (also known as Telekom Indonesia), conglomerate Astra International (ASII), Bank Mandiri (BMRI), Bank Rakyat Indonesia (BBRI), cement producer Indocement Tunggal Prakarsa (INTP), Bank Negara Indonesia (BBNI), miner Bumi Resources (BUMI), pharmaceuticals manufacturer Kalbe Farma (KLBF), construction concern Pembangunan Perumahan (PTPP) and Bank Central Asia (BBCA). (For related reading, see: This Asian Nation Is Poised For Steady Growth.)

• Exchange Traded Funds (ETFs)

Taking the ETF route is one of the best ways to invest in Indonesia. These funds give exposure to the country’s stocks in a diversified way, as they hold multiple stocks across different sectors. There are only a few ETFs which are exclusive to Indonesia and are traded on the New York Stock Exchange (NYSE).

Indonesia Index ETF (IDX) seeks to replicate the performance of Market Vectors Indonesia Index. The Index provides exposure to publicly traded companies that are domiciled and primarily listed in Indonesia, or that generate at least 50% of their revenue in Indonesia. It currently has a portfolio of around 53 companies with financials as its top sector (32%) and has delivered YTD returns of 26%. The top five holdings are Bank Central Asia, Astra International, Telekomunikasi Indonesia, Bank Rakyat Indonesia and Bank Mandiri.  

The iShares MSCI Indonesia ETF (EIDO) seeks to target the returns of the MSCI Indonesia Investable Market Index, an index composed of Indonesian stocks. The top five holdings mirror those of the Indonesia Index ETF. The fund has posted a return of 26.93% so far in 2014. (For related reading, see: Why Vietnam Deserves Your Next Investment Dollar.)

The Market Vectors Indonesia Small-Cap ETF (IDXJ) seeks to replicate the performance of Markets Vectors Indonesia Small-Cap Index, which provides exposure to small-capitalization companies headquartered in Indonesia or generate at least 50% of their revenue in Indonesia. It's a compact portfolio of around 36 companies with Multipolar Tbk (MLPL), Hanson International Tbk (MYRX) and Pembangunan Perumahan (PTPP) as its top three hodings. The fund is up by 23% so far in 2014.

Investors can also take a look at Aberdeen Indonesia Fund (IF), a closed-end fund. It's maximum sector allocations include financials (24%), consumer staples (22%), consumer discretionary (20%), materials (11%) and industrials (9%).

In addition to the Indonesia-only ETFs, there are several others that have significant exposure to Indonesian companies along with stocks from other countries. Some of the prominent ones are the Global X FTSE ASEAN 40 ETF (ASEA) and the Market Vectors Coal ETF (KOL). (For more, see: Ways To Invest In Developing Countries.)

• American Depository Receipts (ADRs)

American Depository Receipts (ADRs) are another good way to get exposure to Indonesia. The limitation lies in the fact that only a few companies are listed as ADRs on NYSE or NASDAQ. Telekomunikasi Indonesia (TLK) is one of the largest communications and information provider in Indonesia and is the only ADR traded on the NYSE. For more options, investors will have to look toward over counter (OTC) listings, where 40 Indonesian companies trade.

• Direct Access

The easiest way to access the Indonesian stock markets for foreigners is by opening an account with an Indonesian brokerage or securities firm that is a member of the IDX (for a list of brokers, click here). The process involves submitting a copy of your passport, filling in the broker’s agreement form and paying a deposit. (For related reading, see: Why You Should Invest In This Vibrant Asian Nation.)

Bottom Line

Like many developing nations, Indonesia is not free from problems — among them are lack of infrastructure, corruption and poverty. Indonesia needs to develop basic infrastructure, transportation, services, education and to fully realize the potential of its natural resources while fostering the development of alternative energy sources. The government needs to work on the problem areas and put the right policies in place. If its new pro-business leader, Joko Widodo, is able to make the appropriate changes Indonesia's economy and stock markets could prove to be excellent bets going forward. (For related reading, see: Asia's Other Tigers.)

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