Companies around the world have come to milk Indonesia for all its worth
More than 17,500 islands dot the country of Indonesia. Riddled with volcanoes and forests, surrounded by 50,000 miles of coastline, this nation is rich in natural resources.
Nutmeg and cloves, coffee and tea, rice and rubber... Agriculture is a major force in Indonesia's economy, employing more than 42 million people. But the world at large isn't just salivating over Indonesia's crops.
Crude oil, natural gas, tin, copper and gold reserves have drawn international attention to this country, and Indonesia has welcomed it with open arms.
It's a founding member of ASEAN, the Association of Southeast Asian Nations, and the East Asian Summit. It restored relations with the Peoples Republic of China after years of anti-communist sentiment.
This philosophy is clear in Indonesian eyes. With so many distinct ethnicities, religions and languages, Indonesian society had to unite in their differences. In fact, its motto is "Bhinneka tunggal ika," literally "Many, yet one."
That's why Indonesia has become a global partner for so many international organizations, signing the ASEAN Free Trade Area agreement, becoming a member of the UN in 1950, joining OPEC and the WTO.
And that's why companies around the world have come to milk Indonesia for all the natural resources it's worth.
Actually, some commodity analysts are a bit concerned about how big a piece of the pie the rest of the world is getting. Some are saying that Indonesian global partnerships aren't leaving enough commodities for national consumption.
The country was forced to raise export tariffs for some commodities like palm oil.
Indonesia is one of the largest exporters of natural gas and coal, too. Both China and India have secured supplies for the next 20 years from Indonesia, and that's causing concern among local power producers.
In this regard, Indonesia may be doing too much of the right thing. How can you blame them with commodity prices spiking across the board? It's certainly an issue that the nation has to take a hard look at. The government is considering limitations on coal exports, reserving resources instead for new infrastructure, like natural gas-fired power plants for its own power generation.
And just the other week, Indonesia announced that it was leaving OPEC since it's no longer a net exporter of oil. While the oil cartel hasn't officially commented on the move yet, everyone knew this was coming.
Indonesia is now a net importer of oil production at 860,000 barrels a day and falling, and it's struggled to find new reserves.
Add to that soaring oil prices that have pushed up inflation and a recent cut to fuel subsidies, and you've got protests in the face of increasing demand.
It seems like a dire situation indeed...
But while Indonesia is finding a balance between its domestic and overseas interests, investors shouldn't be deterred from taking advantage of one of the most resilient markets in the world.
CNBC notes, "Indonesia was also among the fastest markets in the region to recover from the global equities meltdown in January this year and in August last year."
Indonesian GDP grew 6.3% in 2007, and is expected to grow 6.5% this year, with faster growth in the fourth quarter as Indonesia gears up for elections in 2009. And investor interest has seen double-digit growth last year, with 2008 expected to be another strong year.
Singapore's DBS Group finds that "total foreign investment applications last year surged to another record level, almost tripling to USD 40.1 bn." Domestically, investment is also climbing, rising 15.5% in 2007.
The countries interested in investing in Indonesia are varied: the US, Singapore, the UK, Japan, Australia, and many others. Now, Middle Eastern countries are getting in on the game, and they'll be using their oil dollars to seek out investment opportunities.
As a result, these investments lead to two things: increased interest in Indonesia's natural resources, and increased funds to raise Indonesian standards of living. Banks, telecom companies, energy producers, miners, and infrastructure companies are going to feast off these investments.
They already are, in fact. Last year, Indonesia's market had an amazing ride. Its Jakarta Composite Index climbed 51.4%! And the JCI has averaged 109.7% since 2003 for a stellar climb of 548.6% in the last five years.
To me, that signals strength and sustainability... Now, how does one take advantage of this potential?
Surprisingly, there aren't many ways to play Indonesia purely without opening an account with a Securities Exchange Member licensed by the Jakarta Stock Exchange. But we were lucky enough to find a closed-end fund and an ADR with some promising prospects.
Credit Suisse' Indonesia Fund (IF: AMEX), as it offers a reasonably broad entrée to this market. Its top ten holdings are:
- Telekomunikasi Indonesia,
- Bumi Resources,
- Astra International,
- Bank Central Asia,
- Bank Rakyat Indonesia
- Perusahaan Gas Negara,
- United Tractors,
- Bank Mandiri
- Bank Danamon Indonesia,
- And Bakrie & Brothers.
If that seems weighted a bit heavily toward banks, your perception is correct: Some 31% of the fund is exposed to regional financial institutions. However, the lion's share of the fund's holdings - more than 60% - is evenly spread across telecommunications, consumer goods, basic materials, and industrial stocks. This breadth makes IF a reasonable proxy for the Indonesian market as a whole.
It's also looking really cheap right now, as high oil prices have battered this market.
As the largest market in Southeast Asia, Indonesia could be on the next list of hot spots for investors. Some are already wondering why it's not already included. One of the reasons why its not is because the region is being underreported.
All the headlines are rushing to India and China, and newcomers like Vietnam and Malaysia. But that's not stopping big-name investors from starting to pour cash into Indonesia.
That's where IF comes in. Investments across sectors are going to inject this fund with some much-needed energy.
We're already seeing a turn around. Since mid April, IF has rebounded 13.3%.
You don't want to miss the next leg up.
-- Sara Nunnally
