You may have heard that the BRIC countries (Brazil, Russia, India, and China) can offer a potentially high-growth, long-term investment opportunity. Their large populations, rich natural resources, and strong export growth typically attract attention and, in general, these emerging markets have produced solid performance over the past several years. However, with the limelight on the BRIC countries, investors may be missing out on a less-discussed, but potentially stronger performing market: Indonesia.
The same factors that have driven high performance in BRIC countries exist in Indonesia. Additionally, each of these factors has the potential to substantially increase the future output of the Indonesian economy:
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- Population. Indonesia is currently the world's 4th most populous nation with roughly 240 million people, behind only China, India, and the United States. This provides ample domestic demand, and a large pool of low-cost laborers to fuel productivity.
- Rich natural resources. Large domestic oil and metals deposits provide a substantial base of resources for domestic production. As the world's largest producer of tin, and with the second largest natural gas reserves and the third largest coal reserves, commodity exports play a large role in the Indonesian economy.
- Strong exports. Indonesia is a top exporter of palm oil, rubber, timber, tobacco, cocoa, coffee, tea, and spices, as well as other agricultural products. This provides a solid core for the output of the economy and complements the natural resource and tourism components of a well-diversified economy.
Strong economic fundamentals. The Indonesian economy has benefited over the past several years from a democratization movement which began in 1999. The government instituted economic reforms, which have led to a substantial reduction in the country's debt-to-GDP ratio, now at roughly 30 percent. Interest rates are low, signaling a central bank focused on economic growth. And while inflation has been steady between 5 and 6 percent annually, the GDP growth rate has continued to be strong. In fact, despite the 2007-2009 financial crisis, Indonesia's economy avoided recession.
Differences from the BRICs. Although Indonesia has large domestic oil reserves, they have recently become a net importer of oil. This means that the supply of crude in the economy is mostly insulated from the wild price swings and productivity costs that many of the BRIC economies have faced. It also means that Indonesians don't have to compete with China and other emerging markets for access to the global supply of oil.
The democratization movement that took hold in the late 1990s has made significant progress in liberalizing the country. As an added benefit to investors, the government has recently enacted pro-growth policies and economic stimulus programs that have improved growth rates and general economic stability. In fact, some estimates range as high as 20 percent annual growth in private investments year over year.
Energy independence and a relatively stable political system have allowed Indonesia to enjoy a substantial increase in foreign investment, especially in contrast with China―where direct investment is difficult. Investors have easy, direct access to Indonesian equity and debt markets.
Whether you hold a broad emerging markets portfolio, a more specific BRIC portfolio, or are considering your first investment into emerging markets, now may be a good time to consider Indonesia. Over the past several years, a comparison between the BRIC countries and Indonesia shows that Indonesia offers a lower volatility profile with higher potential total returns. A strong infrastructure, stable government, attractive natural resources, and robust exports make this "sleeper" emerging market worth a look.
Timothy R. Lee, CFP®, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service investment and wealth management firm. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor, member FINRA/SIPC. Monument Wealth Management has been featured in several national media sources over the past several years. Follow Tim and Monument Wealth Management on their blog Off The Wall, on Twitter at @MonumentWealth, and on their Facebook page. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results. Strategies involving asset allocation and diversification do not ensure a profit or protect against a loss.