Indonesia Is Not A Tiger, It’s A Giant!

Late next month, President Barack Obama will return to Indonesia for the first time in more than two decades. It will be a homecoming of sorts for the president, who lived in Jakarta for several years as a kid. Foreign investors aren’t waiting for the presidential visit. They have been pouring into Jakarta stocks and bonds all year.

More than $11.5 billion of net new foreign cash has flooded into Indonesian capital markets so far this year—about $9 billion into the local rupiah bond market and $2.5 billion in local stocks. That’s on top of $8 billion in foreign direct investments and billions more in infrastructure and real estate.

Indonesia Stock Exchange (IDX) Building, building confidence.

“Indonesia is the next big growth story in Asia, after China and India,” says Fauzi Ichsan, an economist for Standard Chartered Bank in Jakarta. With 240 million people, a relatively young demographic and strong economic growth, “Indonesia is this year’s story,” just as China, India and Brazil were the big stories in recent years, he says.

Standard Chartered is projecting 6.2% growth in gross domestic product this year, and 6.5% next year. Jakarta is targeting 7% to 8% medium-term growth as infrastructure bottlenecks are removed and the economy gets back to the high growth track it was on before the 1997-98 Asian financial crisis.

Investors like what they see. The benchmark Jakarta Composite Index is up 42% year-to-date in local-currency terms and 51.1% in dollar terms. “This is the third year running that Jakarta has been the best-performing market in Asia,” says Mark Mathews, regional strategist for Macquarie Securities in Hong Kong.

Last week, two initial public offerings—noodle maker CBP Indofood and coal miner Harum Energy—raised more than $1 billion.

A stronger currency and huge interest-rate differentials with developed markets make Indonesia all the more attractive. The rupiah two weeks ago touched 8,900 to a dollar—the strongest it has been in years, despite central-bank intervention to keep the currency from appreciating further and eroding competitiveness.

Newly opened toll road in East Java.

As central banks have opened their taps with quantitative easing, $2 billion a day has been pouring from the U.S., Europe and Japan into Asian emerging markets since April last year, notes David Carbon, an economist with DBS Bank in Singapore. Foreign reserves in Asia have risen by $962 billion, or 13% of Asia’s GDP since then.

Stocks are clearly getting richer. “Yes, multiples are high at over 13.5 times next year’s earnings, but that’s not so expensive when you consider a forecast of 25% earnings growth next year,” says Nick Cashmore, head of research for CLSA in Jakarta.

Surabaya-Mojokerto toll road, ready in 2012.

A good way to play Indonesia is through NYSE-listed ETFs like Market Vectors Indonesia Index ETF (IDX) or iShares MSCI Indonesia Investable Market Index Fund (EIDO). Cashmore says as the stocks have surged this year, investors are rotating from consumer stocks to raw materials. He likes palm-oil- plantation company London Sumatra (LSIP.Indonesia), a beneficiary of higher palm-oil prices; cement maker Holcim Indonesia (SMCB.Indonesia), which is benefitting from the huge local infrastructure boom; and the largest financial institution, Bank Mandiri (BMRT.Indonesia). •