A growing number of investors are looking at the Indonesia stock market and businesses entrenched within the Southeast Asia nation’s economy as a top trade for 2023, supported by the evolving multipolar geopolitical landscape.
It’s a country, according to the bulls, that is uniquely positioned with structural and cyclical drivers of economic growth, and one that has so far avoided the inflationary pressures troubling more established economies around the world.
Yet, Indonesian stocks could barely get cheaper right now, despite the strong performance of key indices over the past year.
“We find an attractive margin of safety with the average PE on the Indonesia Composite index having de-rated by 30% to 15x, compared to an historical average of almost 21x since 2003. This also looks cheap relative to India, the other major emerging market structural growth opportunity, which has a comparable market multiple of 22x,” John Stavliotis, told Asia Markets.
Stavliotis is a portfolio manager of Antipodes, a $10 billion Australian-based value investment firm.
Stavliotis says the seeds for structural growth in Indonesia, Australia’s closest neighbour, were planted when current President, Joko Widodo, swept to power in 2014.
“He entered with a reform agenda aimed at boosting Indonesia’s competitiveness, leading to greater investment and job creation,” said Stavliotis.
“These efforts have taken time to translate to higher growth, but progress is well evidenced, firstly by much higher investment in critical infrastructure. During Jokowi’s leadership, over 2,000 km of roads have been constructed (compared with 780km in the prior 40 years) as well as 16 airports, 18 ports and 38 new dams.
“The “Omnibus law” was passed in 2020 to modernise the informal sectors that employ over 50% of workers. The Law improves labour flexibility, upgrades licensing and legal rights and reduces regulations for foreign investors in priority industries. The outcome is an improvement in the ease of doing business, elevating the nation’s competitiveness.
“Additionally, the government has introduced commodity downstream legislation to encourage nickel producers to invest in local processing capacity to capture a greater portion of the value chain. Based on current capacity projections Indonesia’s share of total refined nickel supply is expected to increase to more than 50% by 2025. Finally, the Government has released the “Making Indonesia 4.0” roadmap to set the stage for industrial reform to further improve competitiveness.
“Progress has not been lost on the broader population and according to a poll (released by Indikator Politik Indonesia in September 2022) 63% of Indonesians approve of the President, leaving Jokowi one of the world’s most popular democratic leaders, even after eight years in power.
“Such support reduces the risks related to him stepping down in 2024, as is required by law at the end of the second term. We are likely to see broad support for a candidate that shares the long-term vision of the outgoing leader.”
Indonesia “playing both sides” of the geopolitical complex
Outside of Indonesia, Jokowi has built a wide support base by effectively playing both sides of the aisle, according to Stavliotis.
“On the one hand, China is the largest import/export destination and a major investor in the country. While Jokowi has also developed close relations with US President Joe Biden and as recently as May he toured the US looking to drive increased investment in the country.
“Hosting the G20 summit is an opportunity to further elevate the nation’s profile and attract investment.”
All of this, according to the Indonesia stock market bulls, leaves the nation in a unique position of political stability, and at the cusp of benefiting from structural improvements while the commodity cycle remains positive.
Indonesia’s current account has returned to surplus for the first time since 2011 and the terms of trade has strengthened, which is particularly constructive given global inflationary pressures and a strengthening USD.
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Coal and plam oil to underpin growth
Indonesia is the third largest producer of coal which is witnessing resurgence in demand and prices as Russian gas and coal supplies are rationed.
“Given the lack of new investment in global thermal coal supply, it is likely that this will continue to meaningfully contribute to the trade balance,” said Stavliotis.
And as the largest producer of palm oil, Indonesia will likely remain a key supplier of cooking oils that are currently in short supply following the conflict in Eastern Europe.
“Beyond this, contribution can be supported over the longer-term as both Indonesia and Malaysia have capped the plantation area growth to limit any further deforestation which will keep the market tight.”
Indonesia is also the home to the world’s largest nickel reserve, with 22% of the world’s total reserves. This provides the country exposure to structural growth in electric vehicles, for which the metal is a key component to the manufacture of batteries.
“Battery grade nickel (99.8% nickel) is constrained due to the global depletion of nickel sulphide reserves. Although Indonesia has a greater exposure to the lower concentration ore, it is building processing capacity to convert this to battery grade. The Government has flagged the opportunity to expand downstream as a priority investment to create an EV manufacturing hub that will improve growth prospects.”