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Foreign Investment---Asian Trader: Don't Write Off Indonesia -- Barron's

16 Sep 2017 10:00 am
By Assif Shameen 

Since it rebounded from the Asian financial crisis in the late 1990s, Indonesia has easily been the best performing market in Asia. Over the past 15 years, it is up 1,297%, well above the 949% gain for India's BSE Sensex Index and the 110% rise for the Shanghai Composite Index. So it's noteworthy that the country's benchmark Jakarta Composite Index hasn't kept pace this year. Its 12% gain is half that of India's Sensex and less than a third that of the Shanghai Composite. But analysts believe Indonesia will retake the lead.

"We like the big picture in Indonesia -- large population, excellent demographics, strong economic growth, and a rapidly growing middle class, " says Monem Salam, who manages Saturna Capital's Asean Equity fund. Long-term investors in Asia ignore Indonesia at their peril, he notes. The country is "building infrastructure -- roads, bridges, power plants, ports, and airports -- and consumption is growing, everything from food to cellular services, health care, and retail banking, as Indonesians move up the social ladder with increasing disposable income."

The economy is expected to grow 5.2% this year and 5.4% in 2018, steadily building on its 5% growth in 2016. The central bank cut interest rates by 25 basis points last month, and a similar cut is expected by December. Indonesian stocks trade at 15.5 times next year's earnings estimates. Corporate earnings are likely to grow 14% next year, after 16.8% growth this year.

Though President Joko (Jokowi) Widodo has been praised for initiating building programs and economic reforms, his party has suffered setbacks from religious conservatives. Jakarta's elections earlier this year were marred by religious schisms that could re-emerge in the 2019 presidential elections, says Rajiv Biswas, chief Asia Pacific economist for IHS Markit in Singapore. Jokowi still commands a strong lead, but Biswas cautions that "the worry is that the lead-up to the election could result in an upsurge of nationalist sentiment against foreign companies, particularly mining companies."

INVESTORS SHOULD TAKE the noise in stride. "Indonesia finally has its act together, but unfortunately it is also a young, noisy democracy now, so there will be times when investors get nervous," Salam says. "To me, any pullback from current levels will be a great buying opportunity."

Nomura's Elvira Tjandrawinata in Jakarta believes that the best way to play Indonesia is through consumer stocks. Her top pick: Indofood (ticker: INDF.Indonesia), the world's largest instant-noodle maker, which trades at 14 times next year's earnings, below its historical level of 15.5 times.

Salam favors Unilever Indonesia (UNVR.Indonesia), the local subsidiary of the Anglo-Dutch conglomerate, and retailer Matahari Department Store (LPPF.Indonesia). The valuation is pretty high for Unilever, "but nothing beats" it over the longer term in providing exposure to the emerging middle class, with its toothpaste, soap, candy, and ice cream. Matahari, down 45% in the past year, is a turnaround play. "Matahari is one of the best-managed retailers in the country, with a strong online strategy, so when Amazon.com and Alibaba come on, they will find an entrenched brand that will be up for challenge," Salam says.

For U.S. investors, there are several ways to access Indonesian stocks. Nearly 50 Indonesian companies trade as American depositary receipts. There are also two exchange-traded funds, the iShares MSCI Indonesia ETF (EIDO) and the VanEck Vectors Indonesia Index (IDX). They're worth a look.

ASSIF SHAMEEN covers Asian markets from Singapore.

Email: editors@barrons.com

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(END) Dow Jones Newswires

September 16, 2017 06:00 ET (10:00 GMT)

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