Two Telcos of Two Emerging Tigers

06/03/2010 12:30 pm EST

Focus: STOCKS

Yiannis Mostrous

Editor, The Capitalist Times

Yiannis G. Mostrous, editor of the Silk Road Investor, and David Dittman say that telecoms of Indonesia and the Philippines are good ways to play those emerging powers.

Discussion of “emerging markets” is too often limited to the Big Four: Brazil, Russia, India, and China, now commonly known as the BRIC.

Other countries in Asia benefit from China and India’s growth and are building sophisticated, self-sustaining economies. Africa remains a continent with vast development potential.

Indonesia is emerging as the world’s next high-impact, multiyear growth story. The island nation features one of the best demographic profiles on the planet, and its people invest at relatively high rates and are better-than-average savers. Domestic savings now fund a greater portion of the government’s fiscal deficit.

In 2009 Indonesia’s public debt declined to 28% of gross domestic product (GDP) from a peak of 93% in 1999, while external debt fell to 32% of GDP from 157% in 1998. Corporations have also improved their finances, reducing net debt-to-equity from 262% to 37%.

Inflation is in a long-term down trend defined by less extreme troughs and peaks. Foreign exchange reserves are on the rise, enabling the government to shore up its balance sheet.

These factors have bolstered foreign investors’ confidence in the country’s commitment to economic growth and development.

The biggest structural challenge facing Indonesia is a lack of physical infrastructure. The government has pledged to spend $140 billion to improve dilapidated ports, relieve congested roads, and upgrade aging power plants.

The best way to participate in Indonesia’s growth story is through companies levered to domestic demand such as auto manufacturers, banks, and telecommunication companies. PT Telekomunikasi Indonesia (NYSE: TLK), the country’s biggest telecom company, will reap the benefits of Indonesia’s gradual transformation. TLK is a Buy up to $42. (It closed below $34.50 Wednesday—Editor.)

The Philippines’ recovery from the Asian debt crisis has lagged its peers, but the nation’s public finances are improving rapidly, foreign direct investment (FDI) is rising, the local currency is strong, and the Philippine diaspora dutifully contributes almost 10% of the country’s GDP.

In a sense, “people” are the Philippines’ greatest export. Filipinos working overseas send home $1 billion to $1.4 billion per month; this money is usually channeled into real estate, though a portion augments families’ domestically earned income. These inflows insulated the economy from the global crisis in 2009, supporting GDP growth of 0.9%.

Recent elections ushered in a new government that’s expected to reduce spending and discontinue some of the protective measures implemented at the height of the financial crisis. Local observers expect the government to sell assets in 2010, with speculation focused on the Philippine National Oil Company.

But the Philippine market is attractive because of the domestic development story—GDP growth should approach 4.5% to 5% this year. Philippine Long Distance Telephone (NYSE: PHI), the incumbent telecom and a relatively defensive consumer stock, is the way to play it. PHI, which yields 6%, is a Buy up to $62. (It closed above $53 Wednesday—Editor.)

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