Upbeat Indonesia Becomes Asia's Investment Alternative as China's Prospects Sour

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There has been one stand-out performer when it comes to Asian markets, whether you’re looking over the last year or the year to date. It’s Indonesia, which has been a consistent winner and the flagbearer for Southeast Asian equities in general, and which stands to benefit as the challenges facing investors in China and emerging markets continue.

The IDX Composite Index in Jakarta is up 7.8% in 2022 and an impressive 19.4% in the last 12 months. That’s in contrast to the 8.4% fall in the S&P 500 in 2022 and the U.S. index’s 6.3% gain over the course of the last year. Despite Indonesia’s positive contribution, the MSCI Asia ex-Japan Index is down 13.5% year to date and a big 22.2% in the last 12 months.

Christopher Wood, the global head of equities at Jefferies, believes there’s still further to go. He notes that overseas investors have bought into the rally. Non-Indonesians have purchased a net US$3 billion of equities on the Indonesia Stock Exchange (the rebranded name for the Jakarta Stock Exchange) so far in 2022.

“There remains clear potential for a post-lockdown cyclical rebound on the back of surging commodity prices, with retail sales in March still 6% below the pre-COVID January 2020 level nationwide and an amazing 57% below in the capital Jakarta,” Wood writes in his latest Greed & Fear briefing. Meanwhile, bank credit growth accelerated to 6.7% in March.

Analysts are downgrading their views of the Chinese economy, and fast, with 40% of the economy locked down. While the fight to achieve “zero COVID” continues, Shanghai is fighting to get factories to reopen. Tesla TSLA is among the manufacturers able to fire up the production line again after three weeks of downtime, although workers will be required to live on site and undergo regular testing in a closed-loop system. Carmakers reportedly account for one-third of the initial 666 companies prioritized to resume production on a government “white list.”

Given the disruption, China will eke out growth of 1.8% in the second quarter, according to Nomura, which slashed its forecast for all of 2022 to 3.9% GDP expansion in China, down from a previous 4.3%. The disruption threatens global growth, a point that’s missed by investors, as I discussed on Monday. And indeed the day after I wrote that piece, doubts over Chinese output contributed to the International Monetary Fund slashing its call for global growth by almost an entire percentage point, to 3.6% from 4.4%.

Indonesia has set an official target of 5.2% growth in 2022, with expectations of growth in a range of 5.3% to 5.9% in 2023. Economists are in the ballpark that the country can achieve that rate of growth, whereas they’re skeptical China can produce growth of “around 5.5%” this year, even though it may officially claim it has.

Asia’s ‘bright spot’

Companies in Indonesia generally have been upgrading earnings forecasts for 2022 as they report first-quarter profits. That explains the “bright spot” that is Indonesia’s performance amid a generally disappointing earnings period in Asia, according to Nomura’s Asia ex-Japan equity strategists,

In all, 12% of listed companies in Indonesia beat earnings estimates in this latest performance period. By contrast, 26% of mainland China-listed companies missed estimates, while 17% of the listings in Hong Kong saw profits miss their mark.

Indonesia’s population of 275 million insulates it from the outsize influence that China has on the rest of the region. The pandemic has been a setback – in the IMF’s eyes, it knocked Indonesia’s people from middle-income to lower-income status in 2021 – but the country is reopening steadily, which should resume its progression to “middle-class” status. Poverty rates have been halved in this century to less than 10%.

Politics is always a concern in Southeast Asia, and particularly Indonesia, a secular democracy that contends with strong religious fundamentalist undertows. Certainly compared with China’s constant intervention on the policy front, the situation has been remarkably stable under pro-reform, pro-business, pro-foreign investment President Jokowi.

Jokowi – full name Joko Widodo – appears to be removing an element of instability that he himself introduced. Faced with the expiration of Jokowi’s second five-year term in 2024, several politicians have backed extending his tenure. Just like in the United States, there’s a two-term limit on presidents, so this would require a change in the constitution. But Widodo’s proponents argue that his efforts to push reform were derailed by the pandemic, meaning he needs and deserves a little more time.

Key among his initiatives is the transfer of the capital from Jakarta to the new city of Nusantara, now under construction on the island of Borneo in the state of East Kalimantan. Not only is Borneo more central than Java in the Indonesian archipelago, but it is also not a volcanic island, unlike the rest of the chain, which faces frequent disruption from earthquakes. There’s also the small matter that Jakarta is slowly sinking into the swamps that once surrounded it as sea levels rise, compounded by the extraction of water from the aquifer. Half the city already sits below sea level, and at its current sinking rate of 1 to 15 centimeters per year, Jakarta could be entirely submerged by 2050, according to subsidence expert Heri Andreas at the Bandung Institute of Technology.

The US$35 billion relocation will still proceed, with many of the administrative functions of government due to shift to Nusantara. Those plans have already been set in motion under Jokowi, who after a suspicious silence has now moved to stop talk of extending his time in office. Earlier this month, he told his cabinet ministers to stop bringing it up and to focus instead on easing the economic hardships produced by the pandemic.

Cut the chatter

“Don’t let there be anyone who talks about delaying or an extension,” he told a cabinet meeting on April 5, in comments then relayed on an official state YouTube channel. “Enough.”

Jokowi’s approval ratings remain high. But so, too, is public disapproval of the idea of extending his stay in office, with democracy advocates fearing it puts at risk gains the country has made under Jokowi, the first president to come from outside the political elite. The country’s first two leaders after World War II and independence from the Netherlands, Sukarno and Suharto, were authoritarians backed by the military, and only Jokowi and his immediate predecessor were directly elected by popular vote.

The transfer of the capital to Nusantara is due to occur in the first quarter of 2024, timed to occur as Jokowi leaves office. The process will continue through 2027, moving the roles of some 25,000 public servants per year.

The indicators look good for renewed Indonesian prosperity. Indonesia is also the only major market around the world where car sales consistently continue to rise. They broke into the black in March 2021, and sales growth has remained very strong ever since, whereas car sales fell 12% in China in March and dropped 21% in the United States. The Indonesian numbers crested above 60% every month except one in the last year (October was “only” 49%), decelerating to just 16% in March. But it’s growth nonetheless, and a sign of the increasing influence of the country’s consumer-goods sector.

How to invest in Indonesia

U.S. investors can play the broad Indonesia growth story through index trackers such as the iShares MSCI Indonesia ETF (EIDO) , which tracks an MSCI index of Indonesian equities designed to provide exposure to large-, mid- and small-caps. It therefore places limits on the amount big-cap stocks can account of the index. The VanEck Indonesia Index ETF tracks the MVIS Indonesia Index that tracks large-caps, though it allows only a maximum single-stock weighting of 8%.


An update on the GoTo Group (IDX:GOTO), which I highlighted as the most exciting new stock listing in Asia. It went public on April 11 with a sold 13% first-day pop, as I explained. The stock has surrendered almost all those gains and ended Friday at 340 rupiah, only slightly above its 338 rupiah per share listing price.

That’s in line with the 0.9% decline in Jakarta stocks since then, but obviously disappointing for investors who bought into the early trading. An e-commerce competitor, Bukalapak (IDX:BUKA), got savaged on social media by short-term speculators who expected massive gains. We’ll have to wait to see the sentiment on GoTo as the year progresses, but I think its prospects remain strong. The company has indicated a desire to list on Wall Street in the past, but hasn’t acted on it yet. Watch this space.