Strategy Note /

Indonesia: A liquid alternative for Frontier equity investors

  • Reforming Omnibus Bill may finally unlock the manufacturing export potential of Indonesia's huge, cheap labour force

  • Following inbound requests we publish a screen of stocks in Indonesia; $4.5k GDP per capita fits FM or FEM more than EM

  • We screen for size, liquidity, performance, and valuation for foreign investors revisiting this neglected part of ASEAN

Indonesia: A liquid alternative for Frontier equity investors
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
7 October 2020
Published byTellimer Research

For those foreign institutional funds able to escape the straightjacket of the unfit-for-purpose indices to which they are benchmarked, Indonesia perhaps merits a revisit, following the structural reform legislation passed this week. A venture into Indonesia stocks could also provide a welcome increase in available trading liquidity for FEM and FM funds suffering repeatedly from having to satisfy redemptions by selling their most treasured, hard to build, positions in markets like Vietnam (where foreign ownership limits are very tight), because they are suffering from positions trapped by FX controls in markets like Lebanon, Nigeria, or Zimbabwe.

Like so many other countries in the MSCI EM index, Indonesia is too small to matter for mainstream global emerging market public equity investors. Indonesia is merely 1.26% of the index, sitting behind Mexico's 1.6%, and dwarfed by the big 5 (China-HK, Taiwan, Korea, India, Brazil make up close to 80%).

Indonesia is not part of the MSCI FM or FEM indices even though, from a GDP per capita perspective, at US$4.5k it fits far better than the currently or recently included countries such as Argentina (9k), Iceland (67k), Kuwait (29k), or Romania (13k).

At US$4.5k GDP per capita, Indonesia is close to some of the largest country constituents of MSCI FEM: Philippines (24% weight, with GDP per capita of US$3.5k), Peru (8%, US$7.3k), and Colombia (5%, US$6.7k).

Indonesia daily traded value has averaged cUS$260mn over the past six months, in its MSCI EM constituent stocks alone. This compares to US$300mn for MSCI FEM and US$150mn for MSCI FM.

See below our stock screen for foreign investors in Indonesia. You can download the high-resolution excel here.

Indonesia stock screen

Related reading

Indonesia adds reform to its cheap valuation (Oct 2020)

Indonesia: Among Asia's cheapest equities after recent 10% fall (Sep 2020)

China manufacturing is irreplaceable but India and other Asians can win share (June 2020)