Building Wealth My grandmother liked my company, but she also wanted me to haul her suitcases through the Indonesian dust.
About 30 years ago, my "oma" joined a group tour with a few dozen other elderly Dutch people to visit the Southeast Asian country.
At the time, I was in my early 20s, and she asked me to come along, in part as her personal porter. She had filled her suitcase with bottled water from home because she didn't trust the local supply. (My grandmother traveled all over the globe, but she liked her bubble.)
The Indonesia of the 1990s was poor and chaotic. It was also exciting and dynamic... as long as you looked out for fake bottled water that was filled from a tap, and topped with an unsealed bottle cap.
The country is huge. It's an archipelago containing 17,500 islands – "more or less, depending on the tides," as one local joked when I last visited three years ago. And around 88% of those islands are uninhabited.
Today, Indonesia has evolved into a modern, growing economy. The country is huge. It's an archipelago containing 17,500 islands – "more or less, depending on the tides," as one local joked when I last visited three years ago. And around 88% of those islands are uninhabited.
Downtown Jakarta, the capital, is crowded with skyscrapers that rival Manhattan's.
And it's a great place for investors to put their money today...
With stock markets around the world wilting under the pressure of rising interest rates, skyrocketing commodities prices, supply-chain uncertainties, and the fog of the Russia-Ukraine War, many investors are more focused on limiting their losses rather than finding new places to invest.
But as I've explained before, diversifying your portfolio is both smart and potentially profitable. The key is to look at markets that are positioned to benefit from the current global economy...
So today, I want to explain why Indonesia provides investors with an excellent opportunity to diversify their portfolios outside of their home markets. I'll also describe a second emerging market that offers a similar opportunity to get outside your investment comfort zone.
A Giant Hiding in Plain Sight
Indonesia is the fourth-most-populous nation on Earth, where the country's 279 million people speak around 300 languages. Jakarta is also the world's second-most-populous metropolitan area after Tokyo.
Reaching a little more than $1 trillion in 2020, Indonesia has the world's 16th-largest economy. Its gross domestic product ("GDP") is a bit larger than Illinois's and four times bigger than Pakistan's.
When I first visited Indonesia, the country was just finding its way in the global economy. Since then, its economy has grown at an average rate of 4.7% per year – compared with 2.3% average annual growth in the U.S.
Indonesia is a major commodities producer, generating coal, palm oil (used in foods, beauty products, and as a biofuel), and natural gas. So Indonesia's economy actually benefits, in part, from the higher prices we're seeing for raw inputs.
Despite Indonesia's size and economic heft, it's overshadowed by other emerging markets – like China and India – and often overlooked by investors. Only two U.S.-listed exchange-traded funds ("ETFs") invest in Indonesia.
And while a handful of recent, big initial public offerings have raised the country's market profile, Indonesia is often an afterthought even for investors who focus on emerging markets. But that may soon change.
The Country of the Future
The third-largest nation in the Western hemisphere – and the fifth largest in the world – Brazil is home to 212 million people.
Its total economic output is around 45% higher than Indonesia's... So if Brazil were a U.S. state, it would be the fourth largest, landing between New York and Florida.
Brazil is a major producer of food, minerals, and oil. It's the world's biggest soybean and sugar producer and the third-largest corn producer. Brazil also exports more beef than any other country. Its biggest exports by value are iron ore – a key input of steel – and crude oil. It's also the world's seventh-largest gold miner.
But Brazil's economic path has been riddled with potholes...
Over the past three decades, its economy has grown an average of just 2% per year. That's due to several factors, including bad government policies, endemic corruption, periodic inflation spikes, and low productivity levels.
Despite lagging growth rates, Brazilians are, in general, richer than Indonesians. Brazil's economic output is $6,700 per capita, compared with Indonesia's $4,300 per capita. (By comparison, the U.S. per-capita GDP is around $66,000.)
What Indonesia and Brazil Have in Common
Both countries are big emerging-market commodities producers that benefit from today's economic environment.
But Indonesia and Brazil remain off most individual investors' radars...
The stock markets of both countries are cheaper than those of the U.S. The price-to-earnings (P/E) ratio of the Brazilian market is just 6, while the Indonesian stock market trades at a multiple of around 15. By comparison, the S&P 500 Index has a P/E of 19 (the Nasdaq Composite Index stands at 37).
While big global markets are having a lousy year, Brazil and Indonesia are both up 2% in U.S. dollar terms. For the sake of comparison... the S&P 500 is down around 21% so far in 2022, the Nasdaq 100 Index has fallen 29%, and the iShares MSCI World Fund – a broad index of global developed markets – is nearly 22% in the red.
But that outperformance is something new. Indonesia and Brazil's markets have been laggards for a long time...
Over the past decade, for example, the iShares MSCI Indonesia Fund (EIDO) – which aims to replicate the MSCI Indonesia Index – has fallen 8% over the past 10 years. The biggest Brazilian ETF, the iShares MSCI Brazil Fund (EWZ), has declined 6% over the past 10 years. Meanwhile, the biggest S&P 500 ETF, the SPDR S&P 500 Fund (SPY), has risen around 240% over the past decade.
But keep in mind that Indonesia and Brazil are still emerging markets... a higher-risk asset class that has been a big loser in the Russia-Ukraine War.
Russia's economic implosion is a reminder of just how sour things can go in emerging markets – particularly those with a weak rule of law.
It also shows us how a powerful authoritarian leader like Vladimir Putin can upend the delicate geopolitical balance... and the lives of tens of millions of innocent civilians.
Of course, the political backdrops of Indonesia and Brazil are different from Russia's.
But emerging-markets investors won't soon forget how Russia – itself a big emerging market – has been a disastrous investment destination...
That could dampen the appetite of investors in other more viable emerging markets for years to come.
However, for investors seeking higher-risk markets that have been performing well, countering home-country bias with the iShares MSCI Indonesia Fund and the iShares MSCI Brazil Fund could make a lot of sense.
Best regards,
Kim Iskyan
July 7, 2022