Indonesia Rises On Resource Boom

Vikas Gattani is a seasoned financial industry veteran with over twenty-two years of experience in trading and investment management in the Asia Pacific financial markets. He was formerly CIO of the internal hedge fund group of JP Morgan Asia and has also run the Asian Investments group at Merrill Lynch, Hong Kong. Vikas is the founder and CEO of Progress Capital, a multi-family office run out of Singapore, which manages assets for ultra-high net worth individuals. 

The idea of this article is to provide fortnightly investment/financial market-related news/views in high growth Asia Pacific markets excluding India. It is intended to provide information and eventual investment opportunities for readers of DSIJ who would like to diversify their investment horizon outside of India.

There have been various political and monetary developments in the Asian countries recently, and the key data emerging from the region are showing mixed trends. With a steadily progressing economy, Indonesia stands out as a potential investment horizon.

Malaysian Prime Minister Najib Razak announced the dissolution of the country’s parliament on Apr 3, 2013, paving the way for the 13th General Elections to be held in the first week of May. This election will be closely contested between PM Najib’s National Front (BN) coalition, which has been in power for over 50 years now, and the opposition leader Anwar Ibrahim-led coalition of three principal opposition parties. In the run up to the polls, PM Najib has boosted government spending, distributed another round of cash handouts and raised civil servants’ salaries.

Chinese authorities tried to ease the concerns arising out of the mounting death toll from the H7N9 bird flu virus. A total to 28 people have succumbed to the virus so far, though there has been no human-to-human transmission of the virus so far. All confirmed cases of the epidemic have been in eastern China – the Shanghai, Zhejiang and Anhui provinces. The authorities have been lauded for greater transparency in the handling of the epidemic as compared to the previous instances of SARS, etc. On the economic front, China’s Manufacturing PMI for the month of March 2013 came in at 50.9 as compared to an estimated 51.2. The CPI eased to 2.1 per cent in March (against an estimate of 2.5 per cent). The 3.2 per cent that was registered in the month of February was largely on account of the Lunar New Year’s prices.

Exports from Thailand decreased 4.6 per cent YoY in February 2013 as compared to the 15.6 per cent growth registered in January. The total trade balance, however, expanded in February to USD 575 million, an improvement from a deficit of USD 2.8 billion the previous month. The CPI came in lower than expectations, at 2.69 per cent YoY and 0.07 per cent MoM. The baht has strengthened over four per cent YTD and is currently the best performer among the 11 actively traded Asian currencies. The country’s central bank, Bank of Thailand (BoT), held its benchmark interest rate at 2.75 per cent despite the government’s calls for a cut in interest rates to discourage capital inflows in the backdrop of a strengthening baht.

Vietnam’s HSBC Manufacturing PMI for March 2013 was up at 50.8, higher than the previous month’s 48.3. In Indonesia, inflation for the month of March quickened to 5.9 per cent YoY (vs 5.56 per cent survey), driven mainly by the prices of foodstuff. Exports extended their slump and stood at -4.5 per cent YoY (vs -1.7 per cent survey). The trade deficit for February widened to USD 327.4 million (against an estimated –USD 206 million). The Rupiah fell for the seventh quarter in January, adding pressure on food prices. Foreign reserves for the month stood at USD 104.8 billion, slightly lesser than the prior month’s USD 105.2 billion.

The Philippines’ foreign exchange reserves went up to USD 84.1 billion in March 2013 (against USD 83.6 billion in the previous month). The central bank attributed this increase to inflows from the country’s foreign exchange operations and investment income, revaluation gains on its gold holdings, and foreign currency deposits held by the national government.

Equity markets around the region have been trading sideways through the month despite the continued strength of the US markets. Only the SE Asian markets of Thailand, Philippines and Indonesia have continued to show strong performance, while Hong Kong, China, Korea and Taiwan have all been down between two-five per cent over the last six weeks since March 1, 2013. While one may argue that this is a case of reverse fund flows, i.e. fund outflows from Asia into the US, a considerable part of this weakness is also led by weakening economic data coming from China and a lack of significant reform measures in the wake of China’s NPC meeting held in March.

Of course, the major mover in Asia has been the Japanese Nikkei, led by a weakening Yen as a direct fallout of the aggressive monetary easing policy laid out by PM Shinzo Abe and the BoJ Governor Haruhiko Kuroda. The BoJ has set an inflation target of two per cent to be achieved in the next two years, reversing the course of several years of Japanese deflation, and has embarked on its own QE program targeting doubling of the monetary base to achieve that inflation target. Consequently, the Yen has further weakened from its recent low of 80-100 Yen to a USD, i.e. by 25 per cent in the last four months and the Nikkei has surged 28 per cent this year.

Actionable Idea

I would like to discuss the Indonesian market in some detail at this juncture. The economy has progressed steadily under President Yudhoyono’s leadership over the last five years, with the country registering 6.5 per cent GDP growth.

A country of 240 million people, Indonesia has benefitted immensely from the resources boom over the last 10 years. Even as the boom comes to an end, the consumer and banking sectors continue to show very strong growth on account of rising income levels and ongoing liberalisation. Political stability, rising income levels and positive policy measures towards foreign investment have led the JCI’s (Jakarta Composite Index) four-year multi-bull run, whereby the index has almost quadrupled from a low of 1128 to the current levels of 4800. The rise of the market is similar to what was seen in the period of 2003-2007 in India, where the Nifty went from the 950 levels to the 6300 levels at its peak. JCI consolidated very well in 2012 and has just about broken up from the previous 4300 levels. The market is trading at 15.5x its FY2013 earnings and 13x its FY2014 earnings.

Indonesia’s earning yield less 10-year bond yield at about 1.5 per cent is at extremely attractive levels in a historical context. The consumer sector, especially, is showing a spectacular 25 per cent plus earnings growth. Risk to the market comes in the form of national elections to be held in mid-2014 in case the incumbent government loses its mandate and leads to another era of political instability and policy paralysis. However, this last phase of liquidity-induced bull market rally can provide handsome gains over the next 12 months. One can take exposure to this market using the US-listed Indonesian tracker, IDX US.