Tips for Investing In Indonesia And What You Should Leverage
Chief Investment Officer Liew Kong Qian of PT RHB Asset Management Indonesia reveals the key investment areas for 2017
Investors looking to invest in Indonesia businesses will be pleased to know that they have been hugely profitable across many sectors – a history of high inflation conditions has predisposed the population to rising prices and this has not really been challenged in the past. Another contributing factor is that little was done previously to introduce competition.
This is to the extent that Indonesian state-owned enterprises (SOEs) are among the most profitable companies – in sectors such as banking, cement, gas distribution and toll roads – compared to most parts of the world.
“President Joko Widodo’s attempts to make prices more affordable, abruptly introducing competition or adopting a nationalistic approach to natural resources (through mining value chain and fisheries) directly hurt businesses that are used to lax regulation, enforcement and large profits,” says Liew Kong Qian, Chief Investment Officer of PT RHB Asset Management Indonesia.
However, Liew emphasises that these businesses are not making losses – they have only become less profitable: “We expect to see lower profits from Indonesia companies compared to five to 10 years ago, which is a similar trend we observe for other markets in general.”
Liew points out that President Widodo is a catalyst for dismantling structures of excessive private profit. “But even then, some sectors and businesses – such as telecommunications, FMCG and construction – have avoided direct intervention by the government to reduce profitability,” he adds.
Where are the opportunities?
According to Liew, opportunities in the market where demand is already growing faster than supply lie in mobile telecommunications and infrastructure construction services. “Telecommunications and construction are in the middle of a demand up-cycle and this is good for company profits in these sectors,” Liew discloses.
Liew adds that cyclical sectors such as residential property and banking are expected to show improvements in 2017.
“A key investment opportunity is real estate, because the opening of access via roads, ports or airports can increase economic activity and property value,” reveals Liew, adding that the government has developed programmes to promote foreign direct investment and domestic direct investment in locations across Indonesia through its Investment Coordinating Board (BKPM).
“Apart from that, sharp recovery in commodity prices – which helps cash flow, debt repayment and recovery of otherwise ‘impaired’ businesses – improves the outlook for companies within the commodity value chain,” says Liew. This loosely includes banks (loan exposure to the mining sector), equipment suppliers and mining service providers.
Indonesia’s GDP Growth Rate:
Investing in indonesia in numbers
Within listed equities – Liew suggests that the three sectors where valuation is not excessive are telecommunications, banking and property. “The latter two – which are cyclical sectors – are dependent on a more substantial improvement in the Indonesian economy,” he adds.
Liew reveals that markets with excess supply include cement (despite the construction boom), office space in Jakarta and retail space in certain locations (possibly due to e-commerce changing consumer shopping habits).
Economic growth is still expected, but at a much smaller margin
According to Liew, Indonesia’s economy saw a mild acceleration between 2015 and 2016 – with GDP growth rate improving from 4.9% to 5.0%. “Compared to the past decade – where growth averaged 5.8% (4.7% in 2009 due to the global financial crisis) – growth has stabilised but remains weak,” he adds.
The Ministry of Finance’s GDP growth forecast for 2017 stands at 5.1%, representing a slight improvement from 2016. Liew believes that the current key driver of the economy is the government’s infrastructure programme, which has helped to anchor GDP growth at around 5%.
“There will be spillover effects from infrastructure development that will be felt for several years – improved transportation, shorter cycle times, access to more locations and development opportunities for local communities,” Liew adds.
Apart from that, Liew says that substantial changes in the economy and policy throughout 2015 and 2016 under President Widodo’s administration have yet to be reflected in the headline GDP number because of time lag and temporary disruptions (such as the tax amnesty). But he believes these changes set a positive tone for 2017.