Emerging Markets: Why Indonesia is looking good right now

Indonesia seems to have the right natural resource endowment and policy mix to prosper, argues Pendal’s JAMES SYME

• Indonesia looks promising for EM investors
• Strong demographics support confidence
• Find out about Pendal Global Emerging Markets Opportunities fund

INDONESIAN equities could outperform over the next 18 months on the back of high commodity prices, strong domestic demographics and supportive monetary policy, says Pendal’s James Syme.

Emerging markets (EM) investors have faced tough going in 2022 as the once-booming Chinese economy slows and a rising US dollar draws capital away from developing economies.

But commodity-exporting economies have prospered.

Brazil, Mexico and the oil-rich Middle East have been this year’s standouts — and Indonesia is well-placed to join that list says Syme, who co-manages Pendal Global Emerging Markets Opportunities fund.

Pendal’s EM team follows a top-down, country-driven allocation strategy, analysing factors such as a country’s economic growth, monetary policy, market liquidity, currency, governance, politics and equity market valuation.

“Energy balance is a huge determinant of what happens to countries in 2022, says Syme.

“Indonesia is a very significant coal exporter. Coal was 17 per cent of all exports in the first half and coal prices have been extremely well bid globally.

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“There’s been a shortfall of production and it’s a major substitute for oil and natural gas in electricity generation around the world, so Indonesia has benefited from both volumes and prices of coal.

“Indonesia is also a major oil and gas producer. A lot of that gets consumed domestically, but at the margin it’s an exporter as well.”

And it’s not just energy. Indonesia is a leading exporter of palm oil, which is in demand due to disruptions to the edible oil trade from the Russia-Ukraine war.

The south-east Asian nation is also a significant exporter of metal ores, principally nickel.

“So really across the board, we’ve seen strong drivers for Indonesian exports,” says Syme.

“As in Brazil, as in South Africa, as in Mexico, that underpins the terms of trade, it underpins the current account balance, and it enables growth to be stronger.”

An urbanising nation

Terms of trade — the ratio of export prices to import prices — is crucial to emerging markets where economic growth is chiefly funded through exports or foreign capital flows.

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The higher US dollar in 2022 has made capital flows harder to come by but strong commodity prices have supported exporters.

Syme says Indonesia’s attractiveness goes beyond its status as a commodity exporter.

It is world’s fourth most populous country with 270 million people and is rapidly urbanising with a burgeoning middle class.

“Productivity and disposable incomes increase when people move from the countryside to the city,” says Syme.

“Indonesia has extremely attractive demographics in terms of both labour supply but also domestic demand.”

Policy is also supporting investment confidence.

Bank Indonesia, the country’s central bank, has considerable foreign exchange reserves and has successfully intervened to support the rupiah, which has kept a lid on inflation.

“It means that inflation is still below 6 per cent and although the central bank has been hiking, they haven’t had to do the big rate hikes that we’ve seen in some other parts of the world.

“It has been a difficult year for a lot of countries, but Indonesia seems to have the right natural resource endowment and policy mix to relatively prosper.”

About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here