With developed markets battling deflation and Chinese growth decelerating due to past investment and excesses, Indonesia stands out as a strong economy supported by domestic factors, NN IP believes.
Smriti Shekhar, Portfolio Manager, Emerging markets Equity Team, NN Investment Partners, commented: “While many developed economies are expected to continue their loose monetary policies, the efficacy of those policies is highly questionable. Against this backdrop it is hard to find structural and sustainable growth stories. Indonesia, with its favourable demographics, strong consumption and investment led growth prospects, robust fiscal discipline and inflation of around 3-5% stands out as an attractive market.”
Indonesia’s demographics are a strong supporting factor. Approximately 67% of Indonesia’s population is aged between 15 and 64 years. GDP per capita at only USD 3,300 (versus USD 7,900 in China and USD 9,900 in Malaysia) and a young aspirational population provide a long runway for growth.
Indonesia’s consumption patterns are evolving: there is substantial scope for urbanization and mortgage penetration, providing long term growth options for many industries. After subdued consumption in autos, property and consumer discretionary spending the last quarter has seen some revival. Given that around 60% of Indonesian GDP is consumption-led, the easing of tax vigilance and low inflation should lead to a recovery in consumption.
Indonesia also has a powerful combination of high savings and investment ratios, which are both key for economic growth. Additionally, the government’s thoughtful policy reforms including cuts in fuel and electricity subsidies, a tax amnesty scheme for recognizing undisclosed domestic and foreign wealth and a vast array of infrastructure projects can help stimulate the economy.
Smriti Shekhar added: “The change of government and the policy announcements have led to some re-rating of the overall valuations of the Indonesian equity market. However, we still see value from potential positive revision ratios in earnings-per-share and reasonable price-to-book valuations in several sectors. While volatility will be a given, we are constructive on the Indonesian market.”
“Banks are a great play on the recovery in consumption and investments, both in infrastructure and pent-up residential real estate demand. We prefer banks with stable growth and asset diversification strategies. The low penetration of automobiles and favourable demographics make us bullish on this sector, and therefore we like select automobile manufacturers.”
NN IP identifies a number of risks, including the traditional high vulnerability of the rupiah to global liquidity in investment flows. This makes potential US rate rises an issue. Another potential risk is the shortfalls in funding for the country’s infrastructure budget, given the originally high tax revenue collection targets. Besides that, there’s a risk of muted consumption recovery as a result of lower repatriations from tax amnesty declarations of offshore wealth and state intervention. Lastly, we see state intervention limiting banks’ lending rates to the corporate sector, which could be regarded as a negative factor, since this interferes with their banks’ ability to price risk effectively.