Don't Ignore Indonesia

06/23/2009 9:10 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

The world's third-largest democracy boasts a strong economy and a near-term catalyst for further gains, writes Carlton Delfeld of Chartwell ETF Global Report.

One country often overlooked by investors is Indonesia. This is unfortunate given that it has the world’s fourth largest population, is the world’s largest Muslim country and is the world’s third largest democracy. (India and the United States are the two largest—Editor.)

Indonesia’s economy has also weathered the global turmoil remarkably well. Indonesia is rich with minerals, metals, [and] oil, and has a budding tourism industry. Another relative advantage for Indonesia: It is less reliant on exports, and its low interest rates and surging consumer confidence [are] fueling economic growth that is expected to accelerate to 8% per annum by 2011.

Recently completed parliamentary elections indicate that the strong showing by President Susilo Bambang Yudhoyono’s Democratic Party will be tough to beat in the upcoming July presidential election. The re-election of Yudhoyono will give a boost of confidence in a country that, like India, has a youthful population and a growing middle class.

Indonesia’s growth rate has also held up well during the global meltdown, it has reduced its government debt, and consumer spending and private investment are also on the upswing.

While its margin for error is still low, since 2003, government debt as a percentage of [gross domestic product] has almost been halved to around 30%, while inflation has settled in around 6%, and private investment has risen nearly 20%.

Indonesia’s oil production has declined in recent years due to aging reserves and it formally exited OPEC in 2008, becoming an oil importer, but it ranks second in the world in liquefied natural gas exports and is less reliant on oil exports than in recent years.

It also has the third largest amount of coal reserves in the world, ranks first in tin production, and has significant gold, silver, copper, and nickel deposits. On the agriculture side it is a top exporter of palm oil, rubber, wood, tobacco, cocoa, coffee, tea, spices, and shrimp.

While the Jakarta Stock Exchange has had a good run this year, valuations are reasonable relative to India and its market will get a boost from any up tick in commodities such as palm oil, gold, silver and copper and nickel.

Indonesian Telecom (NYSE: TLK) is an excellent proxy for the Jakarta market with the bonus of a sizable dividend and nice margins. A broader play would be the Market Vectors Indonesia ETF (NYSEArca: IDX), which has a sector breakdown of 29% financials, 20% energy, 17% materials, and 19% consumer staples and discretionary.

I prefer the closed-ended alternative, the Indonesian Fund (Amex: IF). You can expect high volatility with commensurate upside potential. The risk factor for IF is high. I suggest an 8% trailing stop loss.

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