This place isnâ€™t on most investorsâ€™ radars…yet. But that will change soon.
- Is a member of the 20 wealthiest nations on earth: the G-20
- Is the worldâ€™s third largest democracy, after India and the US
- Has the worldâ€™s fourth-largest population of 240 million people
- Has a stock market that has gone up nearly 44% in the past year
- Has doubled its economy in the past five years
The place Iâ€™m talking about is Indonesia.
Youâ€™ve heard of the BRIC economies â€“ Brazil, Russia, India and China. These are the â€œbig gunsâ€ in the emerging markets world.
Jim Oâ€™Neil, a well-known Goldman Sachs analyst came up with the term back in 2001 in a paper titled â€œThe World Needs Better Economic BRICs.â€ Oâ€™Neilâ€™s point: The BRICs would become the worldâ€™s four dominant economies by 2050.
Think of Indonesia as the â€œfifth BRIC.â€
Indonesia is slightly smaller than Mexico. Or about three times the size of Texas. The bulk of the population lives on just five major islands: Sumatra, Java (the location of the capital city Jakarta), Sulawesi, Borneo and New Guinea. But the countryâ€™s land mass is spread over an archipelago of 17,508 islands, of which about 6,000 are inhabited.
This string of islands is on a strategic location slap bang in the middle of major sea-lanes linking the Indian and Pacific oceans.
With a GDP of $521 billion, its economy is less than half the size of its nearest BRIC cousin. But itâ€™s certainly big enough to invest in. Itâ€™s a well-diversified economy with sizable incomes from agriculture, natural resources and manufacturing. Itâ€™s also well situated between India and China. This means its exports should grow as these larger neighbors grow.
Indonesia also has a relatively stable government under Susilo Bambang Yudhoyono. And although levels of corruption are still too high for comfort, it is recognized to be less corrupt than BRIC member Russia. In general the trend is for less corruption over time.
According to The Economist, Indonesian GDP will grow by 5.9% next year. Thatâ€™s almost three times the World Bankâ€™s 2.4% estimate for the developed economies. And nearly three times the 2.5% forecast for the US (which by the way, looks optimistic).
More important, this growth is being driven by the private sector, not by government spending. In Indonesia, the private sector accounts for roughly 90% GDP.
Also, Indonesia is well isolated from the weak economies of the US and Europe. Only 11% of its exports go to the US. The bulk of the other 89% go to Asian nations. This is another reason to have confidence in the countryâ€™s future prospects.
Thereâ€™s more good news on the consumer-spending front, too. Over the past five years, the average income has doubled to $2,350 a year. And a report by Deutsche Bank predicts that figure can rise another 50% by the end of next year.
Despite this income growth, Indonesia still has the lowest unit labor costs in the Asia- Pacific region. This has attracted manufacturing activities from China. Employment growth is critical, because half of Indonesiaâ€™s population is 25 years old or younger.
This means the workforce as a portion of total population will rise over the next 20 years. This should further increase the countryâ€™s consumption levels and fuel further economic growth.
But before we move on, I want to flag three risks associated with Indonesia.
First, there will be a change of president in 2014. A shift away from the reforming agenda of the current administration would be negative for investments.
Second, if big international investors get spooked by emerging markets, Indonesia could suffer badly. But itâ€™s important to remember that any turning away from the emerging markets usually only lasts for a short time.
A good example of investors getting spooked (big time) is the recent financial crisis following the subprime mortgage meltdown. Between February and November 2008, the MSCI Indonesia Index fell 72%, measured in US dollars.
Of course, the crisis had nothing to do with Indonesia. Investors everywhere were simply panicking and selling indiscriminately. But (and this is a big but) the index then came roaring back. Itâ€™s now up 319% from its lows in November 2008. If youâ€™d bought at the pre-crisis peak and held on, youâ€™d still have made 17% on your investment, measured in US dollars.
Serious investors shouldnâ€™t worry too much about this kind of illogical, short-term market volatility. In fact, if this kind of panicked selling happens again, Iâ€™d be recommending you invest more into Indonesia (plus a lot of other places).
Third, Indonesia runs along an active fault in the Earthâ€™s crust. There are quite regular earthquakes and volcanic activity. From time to time this activity can produce major natural disasters. The most infamous recent example was the 2004 tsunami, when a huge undersea earthquake off the west coast of Sumatra triggered the massive waves that pounded parts of Thailand and other countries in the region.
However, despite the omnipresent risks of investing in Indonesia, the countryâ€™s stock market has been performing brilliantly. The MSCI Indonesia Index has gained 26% a year over the past 10 years, measured in dollars. This investment performance means that the Indonesian stock market has been one of the strongest in the world over the past decade, considerably outperforming all of the BRICs, as well as the loss-making US stock market.
You would have gained 893% if youâ€™d invested in Indonesia over the last 10 years, measured in dollars. In and of itself, thatâ€™s a remarkable run…all the more so when compared to the S&P 500â€™s 15% decline over the same period. Investors looking to capture the upside of the emerging market megatrend, therefore, would do well to look toward the â€œFifth BRIC.â€
The “Fifth BRIC” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”
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The â€œFifth BRICâ€
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.