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Frank Talk
Three Asian Markets We Are Positive On
November 12, 2010
As President Obama wraps up his trip to Southeast Asia, we thought it was a good opportunity to update you on some
Asian markets we have the most positive outlook on: China/Hong Kong, Indonesia and Singapore.
China/Hong Kong
China and Hong Kong have been laggards so far this year but we remain bullish. Government policies in 2010 were
targeted to slow the economy, but next year’s policies should cause less friction to China’s growth trajectory.
The 12th Five Year Plan, scheduled to roll out in March 2011, is expected to focus on transitioning China from
an investment-driven economy to a consumption-driven one. This means further urbanizing the country’s interior
and improving its energy efficiency.
Markets in both China and Hong Kong are also relatively inexpensive, with the price-to-earnings ratios (P/E) roughly
15 times future estimated earnings. In addition, these markets have strong liquidity compared to peers and are
logical destinations for fund flows as investors add more Asian influence to their portfolios.
Indonesia
Indonesia got out of the gate quickly in 2010 and has remained one of the world’s best-performing
markets for the year, up nearly 53 percent in U.S. dollar terms in 2010.
This strong performance has pushed the P/E of the Jakarta equity market up from 13.5 times earnings in August to
18 times forward earnings currently. This is relatively high compared with other emerging markets—the MSCI Emerging
Market Index is trading at 14.7 times and the MSCI BRIC Index is trading at 13.5 times earnings.
However, the fundamental drivers of Indonesia’s market are strong and China can look to Indonesia as a blueprint
for building domestic consumption.
The country’s strong balance sheet—very little leverage—and healthy urbanization trend has led to increased demand
for the country’s rich natural resources. This has driven growth while insulating Indonesia’s economy from external
volatility.
This year’s performance has attracted more investment capital, but that’s just the tip of the iceberg. The government’s
efforts to de-risk Indonesia’s balance sheet could pay off with an investment-grade rating for the country next
year, setting off another wave of investment flows.
Singapore
Singapore gets excellent marks for business development and employment. Employment opportunities are rising and
personal income tax rates have been declining, an ideal situation for increased domestic consumption.
The city-state has one of the lowest corporate tax rates in Asia, 17 percent versus 25 percent in both China and
Indonesia. Hong Kong’s is roughly the same at 16.5 percent. In addition, Singapore has been generous in giving
tax incentives to select industries.
We expect more companies to establish or expand their presence in this city-state.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure
equity market performance in the global emerging markets. The MSCI BRIC Index is a free float-adjusted market capitalization
index that is designed to measure equity performance of Brazil, Russia, China and India.
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An
often overlooked emerging market that's rallying fast
Carl Delfeld
NEW YORK— TheStreet.com
Published Thursday, Sep. 30, 2010 6:14PM EDT
Last updated Friday, Oct. 22, 2010 6:17AM EDT
When it comes to emerging market investing, BRIC nations – Brazil, Russia, India and China – dominate the headlines.
They're big, important countries. And together, they make up about half of the iShares MSCI Emerging Market Index
(XEM-T25.94-0.39-1.48%), one of the most popular exchange traded funds.
But what about the 17 other countries in the fund?
For some time now, I've been monitoring a country that's off the radar screens of even the most sophisticated investors,
one that represents a bigger prize than the BRIC nations.
See if you can guess which emerging market investment I'm talking about. Take a look at these
statistics.
1. It's a member of the global economic leaders club – better known as the G-20.
2. With 240 million people, it boasts the world's fourth-largest population.
3. Its land mass is three times the size of Texas.
4. Its 10-year government bond interest rate is less than Spain's.
5. And, most importantly, it was the best-performing stock market in 2009 and continues to chug forward in 2010.
The answer is: Indonesia.
The driving force behind Indonesia's downturn-defying performance: Since the global economic crisis crushed the
capital markets in early 2009, Indonesia has shrugged off the adversity and been a stellar performer.
And while many investors continue to laud the BRIC nations, Indonesia's economy quietly notched up 4 per cent
gross domestic product growth in 2009 and is projected to top 6 per cent this year. That puts the country in the
same league as Brazil, India and China as one of the world's top emerging markets.
The driving force behind Indonesia's success? Private consumption, which accounts for about two-thirds of the economy
and has carried it through the recent financial turbulence. Consumption kicked 5 per cent higher during the second
quarter, while investments jumped by 8 per cent. The country has attracted billions of dollars in foreign capital
into stocks and bonds.
The Jakarta Stock Exchange has fed off the positive flow of economic news. Over the past year, it's more than doubled.
And its emerging market country ETFs have tagged along for the ride. From its low in November 2008, the Aberdeen
Indonesia Fund (IF-A13.90-0.14-1.00%) is up 372 per cent. And having hit bottom in March 2009, the Market Vectors
Indonesia Index ETF (IDX-N87.81-2.70-2.98%) (IDX_) has catapulted 313 per cent higher.
The Indonesian rupiah has also strengthened by 24 per cent against the U.S. dollar.
Asia's Big Boys Have Indonesia in the Crosshairs
There's no doubt that Indonesia is growing rapidly. But to maintain growth, the country needs to attract more than
$200-billion (U.S.) in new infrastructure investment, so it can develop manufacturing industries and create jobs
for tens of millions of unemployed people.
And two of Asia's biggest players have identified Indonesia as a major target. Both South Korean and Japanese businesses
are expanding their operations there to ride the Indonesian growth wave.
As Gita Wirjawan, chairman of Indonesia's Investment Coordination Board, told the Financial Times recently: “When
I was in Seoul, there was a queue of manufacturing giants showing a thirst to relocate, or move their manufacturing
hub for Southeast Asia to Indonesia.”
In one of the largest deals to date, Posco, South Korea's biggest steelmaker, recently signed a $6-billion (U.S.)
agreement to build a plant in Indonesia with PT Krakatau Steel. And that's not all:
1. Hankook Tire, the world's seventh-largest tire maker, plans to build a $500-million (U.S.) plant in Indonesia
next year.
2. LG Electronics is considering making Indonesia a regional manufacturing hub, according to those close to the
investments.
3. Korea Electric Power, South Korea's state electricity producer, is acquiring a 20 per cent stake in Indonesian
coal company Bayan Resources.
4. In July, Samchully, a South Korean gas supplier, said one of its units would form a joint venture with Indonesian
state energy firm Pertamina to build a liquefied petroleum gas plant in southern Sumatra. It will invest $190-million
(U.S.) to achieve an annual production capacity of 240,000 tons by 2012.
And with regard to Japan, construction has started on a $1.2-billion (U.S.) thermal power plant that will supply
electricity to some of the most densely populated islands.
PT Paiton Energy (partly owned by Mitsui & Co.) and Tokyo Electric Power are building the 815-megawatt expansion
in East Java, with funding from the Japan Bank for International Cooperation and a consortium of Japanese lenders.
The deal adds to already solid Japanese-Indonesian import-export ties. Trade between Japan and Indonesia reached
$28.4-billion (U.S.) last year, making Japan a larger trading partner than China, where the number totals $25.5-billion,
or the U.S., with trade worth $17.9-billion.
In addition, Japan sources most of its coal and liquefied natural gas from Indonesia, while Indonesia imports large
quantities of Japanese electronics. And there are currently more than 1,000 Japanese projects under way, worth
more than $30-billion.
So where does this leave the United States in the equation?
Think strategically about U.S. security issues and you'll realize that Indonesia's importance to the United States
goes far beyond economics, as it borders several key sea lanes.
America needs to build a much broader and deeper relationship with Indonesia by growing through investment, trade
and partnerships like Japan has done. The Financial Times reports that the Japan-Indonesia partnership is just
one of several trade agreements that Japan has. It's also sealed bilateral free-trade agreements with Brunei, Chile,
Malaysia, Mexico, Singapore, the Philippines, Thailand, Vietnam, Switzerland and the Association of Southeast Asian
Nations (ASEAN).
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