Jakarta Is Jumping

12/14/2009 12:16 pm EST


Yiannis Mostrous

Editor, The Capitalist Times

Indonesia's strong fundamentals should help it lead the next leg of the Asian equity rally, writes Yiannis G. Mostrous in The Silk Road Investor.

As I expect global markets to close out 2009 with a strong finish and begin 2010 with positive momentum, I continue to recommend that investors maintain or add to their exposure to Asian equities. Indonesia is one of my favorite markets in the region.

The reelection of Susilo Bambang Yudhoyono to the presidency last July has proved to be a big positive; the newly formed government appears determined to move forward with its efforts to revitalize the economy. Besides revamping the judicial system and other institutions, the government is also moving ahead with plans to improve the country’s infrastructure. If the market deems these efforts sincere, stocks should have sufficient support to move up a leg.

At present, analysts believe the government is on track to address $150 billion of infrastructure needs, 31% of which will come from government spending—the private sector will make up the difference. Execution is the key now.

That being said, the Indonesian economy remains in a sweet spot. The latest numbers show that the trade surplus improved from $1.3 billion in September to $2.4 billion in October. Exports were the bright spot, jumping 10.1% from a year ago.

Imports declined 11.8%, a dramatic improvement from the 24.6% drop that occurred in September. Expect exports to post solid growth next year, as commodity prices should remain elevated and the global economy will continue to stabilize. Imports should also pick up, as domestic demand will gain momentum, especially when the infrastructure spending commences in earnest. And Indonesia has a sound fiscal policy, good balance of payments, and declining government and external debt ratios.

Over a longer time line, Indonesia’s domestic demand appears to be poised for growth. There are 230 million people living in the country, and domestic demand has traditionally been a big part of the economy. Furthermore, economic modernization should increase investment and, eventually, real GDP growth. The country is also a net commodity exporter that will continue to benefit from the structurally higher commodity prices.

The easiest way to gain exposure to Indonesia is through the Market Vectors Indonesia Index Exchange Traded Fund (NYSE: IDX). As an alternative, you can also buy PT Telekomunikasi Indonesia (NYSE: TLK), the biggest telecom company in the country, which also stands to gain from increase demand in mobile services. Finally, for investors who have access to the local market, coal mining company PT Indo Tambangraya Megah (Jakarta: ITMG) is one to look into.

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