How to Invest in Indonesia
Indonesia is the fourth most populated country in the world and the largest economy in Southeast Asia with a 2014 nominal GDP of $888.6 billion. With strong economic growth and a young population, many economists have argued that it should be added to the so-called BRIC economies as an up-and-coming emerging market.
Those looking to invest in Indonesia should start with the Jakarta Composite Index (JCI). While the rest of the world was in a recession between 2009 and 2012, the country's primary equity index jumped from a low of around 1140 to a high of around 4100. And it was one of the only emerging markets in the world to come out of 2011 with any real economic growth.
In this article, we'll take a look at some of the benefits and drawbacks of investing in Indonesia, as well as how U.S. investors can easily build exposure into their portfolios.
Benefits & Risks of Investing in Indonesia
Indonesia's strong economic growth and favorable demographics make it a great country for investors, but there are several risks that investors should be aware of before committing any capital. For instance, the country's strong growth makes it a premier target for inflation, while the country has a greater geopolitical risk than developed countries like the United States.
Benefits of investing in Indonesia include:
- Strong Historic Growth. Indonesia has been one of the best performing investments throughout the world economic crisis that began in 2008. In fact, it was the only economy posting any real economic growth in 2011 and continues to grow in the years since.
- Less Relative Risk. Indonesia may be less risky than many emerging markets, with an average annual return of over 25% and a beta coefficient of less than 0.8, according to a February 2011 study by MSCI and Bloomberg.
- Room to Grow. Indonesia's market capitalization is significantly smaller than the BRIC economies, which suggests that it has ample room to grow, even if overall growth rates were to slow down, according to a NYSSA analysis.
Risks of investing in Indonesia include:
- Inflation Risk. Indonesia has faced rising inflation along with its economic growth. If these rates were to move out of control, it could lead to higher interest rates that may negatively impact the country's equity prices.
- Geopolitical Risk. Indonesia resides in Southeast Asia, which means that it may face more geopolitical risk than developed countries like the United States or members of the European Union.
Invest in Indonesia the Easy Way With ETFs
Exchange traded funds (ETFs) are a great way to invest in Indonesia. While there are only two country-specific ETFs, there are several others with partial exposure to its economy. These funds give investors immediate exposure to the country, as well as diversification across a number of different industries and sometimes asset classes.
There are two ETFs used to invest in Indonesia:
- Market Vectors Indonesia Index ETF (NYSE: IDX)
- iShares MSCI Indonesia Investable Market Index Fund (NYSE: EIDO)
Some other ETFs with significant exposure to Indonesia include:
- EGShares Consumer Goods GEMS ETF (NYSE: GGEM)
- Global X FTSE ASEAN 40 ETF (NYSE: ASEA)
- PowerShares Global Coal Portfolio ETF (NASDAQ: PKOL)
- Dent Tactical ETF (NYSE: DENT)
- Market Vectors Coal ETF (NYSE: KOL)
Invest in Indonesian Companies via ADRs
American Depository Receipts (ADRs) represent another way to invest in Indonesia for investors looking for exposure to specific companies. While there are only a limited number of ADRs available, they represent larger companies that are well positioned in the Indonesian market.
Here are some popular ADRs to invest in Indonesian companies:
- PT Indosat Tbk (NYSE: IIT)
- PT Telekomunikasi Indonesia (NYSE: TLK)
- Tianyin Pharmaceutical Co., Inc. (NYSE: TPI)
- Indonesia has been a solid performer throughout the 2008 economic recession and continues to be an attractive investment destination.
- Indonesia faces risks from inflation and geopolitics, but inflation appears under control and the country remains stable in the region.
- Investors can invest in Indonesia with either ETFs or ADRs, depending on their investment objectives.