Indonesia has been a rocky road for investors, many of whom have sought opportunities elsewhere as slowing exports, a large and increasing trade deficit and a weakening of the country’s currency all took their toll. In fact, Indonesia missed Q1 growth projections this year, with boosts in interest rates and a ban on shipments of raw minerals both playing a major role.
However, this member of the “fragile five”–it, along with Brazil, India, South Africa and Turkey, were labeled as being the most likely to suffer in the event of U.S. quantitative easing–has seen some of its troubles lessen despite its vulnerabilities. And that’s meant the rise of opportunities for investors, who can look to three sectors in particular–but perhaps not where one might expect.
It’s too soon, for instance, to say that nickel could be Indonesia’s ticket back, although some of the country’s troubles stemmed from its position as the largest shipper of mined nickel in the world. In early January, amid dropping nickel prices, the Indonesian government banned the export of unrefined minerals in an effort to compel China to spend more on its mineral purchases. The Chinese government had been stockpiling unrefined nickel and processing it at home.
But the Indonesian government wanted to force a move toward value-added exports, which would not only bring higher prices but also additional jobs to the population. While at first the ban cast a damper on exports as a whole, now the price of nickel is on the rise as China and Japan have both been stocking up on both the unrefined and refined product.
Activity has also begun to increase in Indonesia surrounding smelting, which was the purpose of the ban in the first place. While things seem to be moving in the right direction, the trend has a long way to go.
With 65% of Indonesia’s exports either energy- or commodity-related, the country is heavily dependent on growth in the Chinese economy. Muhamad Chatib Basri, Indonesia’s finance minister, has said that a China slowdown is a bigger threat than QE in the U.S.–and that the country has to diversify away from so much dependence on exports.
Ironically, however, the trade surpluses that Indonesia has racked up for the third quarter in a row look to be pushing the country back toward growth–and if other countries aren’t buying as much as previously, Indonesians themselves seem to be filling the gap. As a result, the three sectors showing the most promise are financials, consumer products on the large-cap side and industrials on the small-cap side.
Amrita Bagaria, ETF product manager at Van Eck Global, said that two of Van Eck’s funds, the Market Vectors Indonesia Index ETF (IDX) and Market Vectors Indonesia Small-Cap ETF (IDXJ), have seen gains in these sectors.
Data from FactSet reflect that, in IDX, financials, with an average index weight of 31.41%, returned 28.73% in Q1 and were responsible for 8.95% of the return of the fund, while consumer staples, with an average index weight of 15.94%, gained 19.34% and were responsible for 3.10% of the fund’s gain.
On the small-cap side, according to FactSet, in IDXJ, financials, with an average index weight of 34.13%, gained 27.71% during the same period and were responsible for 9.25% of the fund’s return, while industrials, weighted at an average of 30.92%, gained 29.58% and were responsible for 9.31% of the fund’s gain.
The three largest holdings in both funds, said Bagaria, are banks.
“It looks like they’ve been taking quite a bit higher net profit because of loan demands by consumers,” she said. “Lending has definitely grown, which indicates strong consumption demand.”
On the small-cap side, she said that while companies are sometimes a little harder to research, it’s probably a similar story regarding financials. With regard to industrials, “the general sentiment I’m seeing is that people seem to think industrial firms will benefit from the upcoming presidential elections, because [the new president] will probably try to push for growth.”
There’s definitely plenty of room for growth in Indonesia, which has a large young population–a fact that the government is using to woo foreign investment in the country. And, according to Mahendra Siregar, chairman of the Indonesia Investment Coordinating Board, plenty of firms outside Indonesia are interested–from automakers to furniture and software to supermarkets.
Only about 10% of Indonesians own cars, and foreign auto manufacturers are moving to take advantage of the 5% monthly increase in car sales the country experienced in Q1. Ikea plans to open a store there in September, so the country will be not only a supplier (of wood) but also a customer. Lulu Hypermarket of Abu Dhabi also plans to launch its first store in Java sometime this year, with expansion plans already in the works, and the National Bank of Abu Dhabi is considering long-term funding for infrastructure projects. Dubai companies are also looking at a range of options in Indonesia.
The country’s own media conglomerate, MNC Group, announced plans back in January to invest billions in fiber optic network expansion, which will help its Chinese joint venture partner Tencent Holdings, as well as other social media and gaming companies, to reach the under-30s that make up half the Indonesian population.
The government is also working to make it easier for foreign companies to do business, and has already created an online option for applications for a “principal license.” That will allow a company outside the country to open an office in Indonesia. Later this year, the country intends to move additional processes online.
With a consumer sector buoyed with optimism over the forthcoming presidential election, the consumer confidence index is at a 16-month, and consumer demand is rising. That could mean plenty of opportunities throughout the sector if the election and the new president live up to their promise.