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July 21, 2014 at 09:20 PM
Like most bottom-up stock pickers, Kenneth Lowe, portfolio manager, and Sid Bhargava, research analyst at Matthews International Capital Management, have been able to successfully find a number of different and interesting investment opportunities in Indonesia, in sectors as diverse as utilities and financial services.
But like most other investors, they are also keen to see some macro changes take place in Indonesia, an economy that over the past few years, has been growing steadily in importance within the emerging markets universe. Those changes, they say, would help to make Indonesia much more attractive to foreign investment and would help bring about greater and more long-term economic growth.
When and to what extent these reforms would come into effect is yet to be seen, since both candidates in Indonesia’s recent presidential elections, Joko Widodo and Prabwo Subianto, have claimed victory. Although most polls indicate that Widodo, who’s popularly known as “Jokowi” and is the governor of Indonesian capital city Jakarta, is in the lead, the official word won’t be out till July 22, when election results from the thousands of islands that make up the Indonesian archipelago will be tallied up. And it’s only after that date that investors will have a clearer picture on who will deliver and, more importantly, how they will deliver several much-needed reforms. In the run-up to that date, here’s how Lowe and Bhargava see Indonesia:
Long Term Strengths/Short Term Challenges, Including Corruption
Indonesia is the largest economy in Southeast Asia and has been growing at a nice clip. It has the trappings necessary for long-term economic growth, Lowe said, and its demographics are particularly favorable, since half the country is under the age of 30, which means that over time, domestic consumption will be a key driver of economic growth.
However, making sure that that can happen by enabling the right kind of environment will be key for the new president, and to a large degree, that means encouraging productivity by making the corporate sector much more open, transparent and vibrant.
Corruption is a big problem in Indonesia and “a lot of the industry sectors typically have powerful, well connected incumbents in place, which may be good from a minority shareholder perspective but it’s not good in the long-term,” Lowe said.
“There’s scope for productivity gains, which would translate to GDP growth, but industry is still dominated by the Old Guard, as it were, and it would be healthy for them to face some competition.”
Indonesia also depends quite heavily on exports to China, whether that be coal or palm oil, but now, “it looks as though the decade of Chinese growth that has helped Indonesia is now starting to top out,” Lowe said. In that same vein, Chinese goods have been flooding the Indonesian market in the past years, but many of these can be produced in Indonesia itself for domestic consumption, Bhargava said, given the right environment.
