The Case for Indonesia

During a recent visit to Jakarta, it was evident that Indonesians are optimistic. Investment managers, business leaders and taxi drivers all voiced their opinion that things are getting better and that the future is bright. Up to now, Indonesia has generally punched below its weight. It is often lumped together with its other ASEAN neighbors Singapore, Malaysia, Thailand, the Philippines and Vietnam. However, Indonesia appears to be poised for a break out. If it is able to achieve its vast potential, Indonesia deserves to be treated as a distinct investment focus and not just as a member of ASEAN.

With 255 million people, Indonesia is the fourth most populous country in the world and the largest in ASEAN. Its economy is also the largest in ASEAN.

After several years of slowing growth, Indonesia’s economy is poised for a strong recovery.  President Jokowi has recently pushed through important reforms, including opening up much more of the economy to foreign investment, reducing red tape, and implementing a series of stimulus packages. These measures are having an impact. Foreign direct investment jumped 16.9% YoY in Q4 2015, and economic growth is forecast to top 5% in 2016 and accelerate thereafter.

Longer term, Indonesia’s economy will be driven by two areas:

• Consumption: Indonesia’s middle class is forecast to almost double from 74 million people in 2012 to 141 million in 2020. Consumer spending is forecast to grow from $480 billion to $820 billion over that period.

• Infrastructure: Jokowi is focusing on infrastructure spending to spur economic growth. Government infrastructure spending increased 47% in 2015 and is expected to increase an additional 32% in 2016. This follows several years of underinvestment that has resulted in higher logistic costs (27% of GDP in Indonesia vs. 13% in Malaysia) and bottlenecks that have limited growth.  

McKinsey forecasts that Indonesia will need to spend $600 billion over the next decade to meet its infrastructure needs. The government has the capacity. The fiscal deficit is a modest 2.5% of GDP and aggregate government debt is only 29%.  

In addition, Indonesian economic growth is expected to be boosted by a demographic divided as half the population is under 30, and a rapid expansion of intra-ASEAN trade as barriers come down. Overall, these factors could boost annual economic growth rates above 7% for the next several years. In fact, the Economist Intelligence Unit forecast that Indonesia’s economy will grow to become the 4th largest in the world by 2050.   

Indonesia’s size and relatively rapid rate of economic growth should gain increasing investor attention in the years ahead.  Mid and small caps look particularly attractive right now as they have declined by over 40% over the past three years (2013-15).

We are planning to increase our Asia fund’s exposure to Indonesia and are considering investing with an Indonesia-focused manager. We share the optimism of the Indonesian people.

Chinus Asset Management (CHAM), a U.S. West Coast-based asset management firm, provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.

© 2016, Chinus Asset Management, LLC. 

China Presents Economic Targets for 2016

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China’s annual parliamentary session of the National People’s Congress kicked off last week, with Prime Minister Li Keqiang presenting the government’s report on its economic targets for 2016.  

The report indicates three key trends that will affect China’s economy and the direction of its macro policies:

1.     Maintaining Growth is a Top Priority

The government set the growth target for 2016 at between 6.5% and 7%, slightly lower than last year’s level of about 7%. A drop in the GDP target indicates that the government accepts lower growth and will focus more on growth quality. By setting 6.5% as the floor, the government delivered a strong signal that China will not allow a hard landing. 

Notably, the government did not set a target for exports, weakening the argument that its adjustment of the exchange rate policy last year was a competitive devaluation aimed at boosting exports.

To meet its growth target, the fiscal deficit will increase to 3% of GDP, up from 2.3% in 2015. Fiscal support is expected to be limited, with monetary policy continuing to play an important role.  

2.     Infrastructure Investment Remains a Key Tool

The main drag on China’s GDP growth in 2015 stemmed from the 50% y-o-y decline in growth of fixed asset investment ("FAI"), which fell to 10% last year. Most of the slowdown came from property investment, which rose only 2% in 2015. In contrast, infrastructure investment was up 17% last year. It is expected that property investment will remain at low levels in 2016, due to sluggish demand in Tier-3 and Tier-4 cities. Manufacturing investment is unlikely to rebound due to overcapacity in many sectors. 

Consequently, infrastructure is the principal means of stabilizing FAI growth in China. The government report emphasized its continued support for infrastructure investment. 

3.     Expect Continued Restructuring of State-Owned Enterprises

There is reason for optimism on the reform of state-owned enterprises ("SOEs"), which the Chinese government recognizes as increasingly unaffordable due to diminishing profits and rising debt. Pressure, incentives and subsidies from the government to restructure these so-called zombie enterprises will differentiate the healthy enterprises from the unhealthy ones, and ultimately lead to the survival of the fittest.

For a more detailed analysis, please refer to "Weekend Reads from China: What Investors Need to Know about the NPC Report".

CHINUS ASSET MANAGEMENT (CHAM), a U.S. West Coast-based asset management firm, provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.  

© 2016, Chinus Asset Management LLC.