Emerging Market Investing: Forget the BRIC Nations and Buy This Country Instead
by Carl Delfeld, Contributing Editor
Monday, September 27, 2010: Issue #1353
When it comes to emerging market investing, there's no doubt that the BRIC nations - Brazil, Russia, India and China - dominate the headlines.
Sure, they're big, important countries. And together, they make up roughly 50% of the iShares MSCI Emerging Market Index (NYSE: EEM), which is obviously a significant chunk of the ETF.
But what about the other 17 countries in the fund?
For some time now, I've been monitoring a country that is well off the radar screens of even the most sophisticated investors - one that I think represents a bigger prize than the BRIC nations.
So pack your bags and let's investigate...
Emerging Market Investing... Consider These Statistics
See if you can guess which emerging market investment I'm talking about. Take a look at these statistics - and feel free to sound smart at your next dinner party, too!
- It's a member of the global economic leaders club - better known as the G-20.
- With 240 million people, it boasts the world's fourth-largest population.
- Its land mass is three times the size of Texas.
- Its 10-year government bond interest rate is less than Spain's.
- And most importantly, it was the best-performing market in 2009 and continues to chug forward in 2010.
Simply put, it's time for investors to move from ignorance to Indonesia.
The Driving Force Behind Indonesia's Downturn-Defying Performance
Since the global economic crisis crushed the capital markets in early 2009, Indonesia has just shrugged off the adversity and been a stellar performer.
And while many continue to laud the BRIC nations, Indonesia's economy quietly notched up 4% GDP growth in 2009 and is projected to top 6% this year. That puts the country in the same league as Brazil, India and China as one of the world's top emerging markets.
The driving force behind Indonesia's success? Private consumption, which accounts for about two-thirds of Indonesia's economy and has carried it through the recent financial turbulence. Consumption kicked 5% higher during the second quarter, while investments jumped by 8%. The country has attracted billions of dollars in foreign capital into stocks and bonds.
A Triple-Digit Sprint for Indonesian Stocks
It's no surprise to learn that the Jakarta Stock Exchange has fed off the positive flow of economic news. Over the past year, it's gained more than 100%.
And its emerging market country etfs have tagged along for the ride. From its low in November 2008, the Aberdeen Indonesia Fund (NYSE: IF) is up 372%. And having hit bottom in March 2009, the Market Vectors Indonesia Index ETF (NYSE: IDX) has catapulted 313% higher.
The Indonesian rupiah has also strengthened by 24% against the U.S. dollar.
And that's laid the foundation for even more progress...
Asia's Big Boys Have Indonesia in the Crosshairs
There's no doubt that Indonesia is growing rapidly. But in order to maintain its growth, the country needs to attract more than $200 billion in new infrastructure investment, so it can develop manufacturing industries and create jobs for tens of millions of unemployed people.
And two of Asia's biggest players have identified Indonesia as a major target. Both South Korean and Japanese businesses are expanding their operations there in order to ride the Indonesian growth wave.
As Gita Wirjawan, chairman of Indonesia's Investment Coordination Board, told the Financial Times recently: "When I was in Seoul, there was a queue of manufacturing giants showing a thirst to relocate, or move their manufacturing hub for south-east Asia to Indonesia."
In one of the largest deals to date, Posco, South Korea's biggest steelmaker, recently signed a $6 billion agreement to build a plant in Indonesia with PT Krakatau Steel. And that's not all...
- Hankook Tire, the world's seventh-largest tire maker, plans to build a $500 million plant in Indonesia next year.
- LG Electronics is considering making Indonesia a regional manufacturing hub, according to those close to the investments.
- Korea Electric Power Corporation, South Korea's state electricity producer, is acquiring a 20% stake in Indonesian coal company Bayan Resources.
- In July, Samchully, a South Korean gas supplier, said one of its units would form a joint venture with Indonesian state energy firm, Pertamina, to build a liquefied petroleum gas plant in southern Sumatra. It will invest $190 million to achieve an annual production capacity of 240,000 ton by 2012.
And with regard to Japan, construction has started on a $1.2 billion thermal power plant that will supply electricity to some of the most densely populated islands.
PT Paiton Energy (partly owned by Mitsui & Co) and the Tokyo Electric Power Company are building the 815-megawatt expansion in East Java, with funding from the Japan Bank for International Cooperation and a consortium of Japanese lenders.
The deal adds to already solid Japanese-Indonesian import-export ties. Trade between Japan and Indonesia reached $28.4 billion last year, making Japan a larger trading partner than China, where the number totals $25.5 billion, or the United States, with trade worth $17.9 billion.
In addition, Japan sources most of its coal and liquefied natural gas from Indonesia, while Indonesia imports large quantities of Japanese electronics. And there are currently more than 1,000 Japanese projects under way, worth more than $30 billion.
So where does this leave the United States in the equation?
Is America Falling Behind These Emerging Markets?
Think strategically about U.S. security issues and you'll realize that Indonesia's importance to the United States goes far beyond economics, as it borders several key sea lanes.
America needs to build a much broader and deeper relationship with Indonesia by growing through investment, trade and partnerships like Japan has done. The Financial Times reports that the Japan-Indonesia partnership is just one of several trade agreements that Japan has. It's also sealed bilateral free trade agreements with Brunei, Chile, Malaysia, Mexico, Singapore, the Philippines, Thailand, Vietnam, Switzerland and the Association of Southeast Asian Nations (ASEAN).
So for big potential gains, I highly recommend that you look beyond the BRICs to countries such as Indonesia, as well as Malaysia, Turkey, Poland, Peru and Columbia.