Indonesia: time to buy

The worst of the emerging-market sell-off was felt by Indonesia. Investors should take advantage and buy this fund now.

Along with India, Indonesia has borne the brunt of the emerging-market sell-off. The Jakarta Composite Index has slumped by 12% in a fortnight.

All emerging markets have been hit now that the threat of tighter money is looming in the US, making emerging assets less appealing. But Indonesia's recent data haven't impressed investors either, notes Bloomberg.com. Annual GDP growth has edged below 6% for the first time since 2010. Exports fell by 4.5% year-on-year in June as commodity prices softened. Inflation is at a four-year high of 8.6%. The central bank has had to raise interest rates, tempering growth further.

But the main worry for investors is the unexpectedly large current-account deficit 4.4% of GDP that Indonesia notched up in the last quarter. This deficit with the rest of the world means that the country needs foreign money to fund its economy. Countries with external deficits are thus seen as especially vulnerable to capital outflows from emerging markets to less risky ones.

However, "despite the gloom, all is not lost for Jakarta", says Abheek Bhattacharya in The Wall Street Journal. The foreign capital that plugs the current-account gap is largely made up of foreign direct investment (FDI) flows. These are far less prone to swift reversals than foreign investments in stocks or bonds, so-called hot money' that can turn tail swiftly. Last year FDI comprised 58% of Indonesia's deficit, compared to 23% of India's in the year to March.

Moreover, Indonesia has reduced fuel subsidies, which had boosted oil demand and hence oil imports. These, along with ebbing exports of other commodities, are the reason Indonesia notched up its first current-account deficit since 1997 last year, says The Economist. According to Nomura, the deficit is now on track to shrink to 2.8% of GDP.

And while further interest-rate hikes designed to defend the rupiah will hamper growth, the long-term story is positive. Indonesia has a young labour force and the number of middle-class consumers is set to double by 2020. So Indonesia is far less dependent on exports than most of Asia. Public debt is only 25% of GDP and household debt is also low. The market jitters have raised the discount to net asset value of the US-listed Aberdeen Indonesia Fund (NYSE: IF) to an unusually large 13%. Time to stock up.

Stay up to date with MoneyWeek:Follow us onTwitter,FacebookandGoogle+

Recommended

Four of the best investment trusts for investing in emerging markets
Investment trusts

Four of the best investment trusts for investing in emerging markets

Investors need to tread very carefully in this risky sector. Here are the best ways to approach it
22 Mar 2021
Storm brews in emerging markets as investors pull cash out
Emerging markets

Storm brews in emerging markets as investors pull cash out

Foreign investors have begun to pull cash out of emerging markets as they begin to look less attractive when compared to the rising return from holdin…
12 Mar 2021
I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021
Central banks are rushing to build digital currencies. What are they, and what do they mean for you?
Bitcoin

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?

As bitcoin continues to soar in value, many of the world’s central banks are looking to emulate it by issuing their own digital currencies. But centra…
8 Apr 2021