For full story & graphics please visit the original source: TrustnetIndonesia has proved an unlikely investment opportunity in the last ten years, or is the real winner volatility?
In the past 12 months the Indonesian index returned 107.24 per cent. Compare that with MSCI Thailand returning 53.33 per cent, MSCI Singapore 49.95 per cent, and MSCI Malaysia 46.66 per cent.
But, before betting the farm on this market rather than its neighbours or the typical portfolio core of UK equities and fixed income, it is worthwhile taking a look at what level of volatility investors were required to put up with in order to achieve such returns. Over the past three years this has clearly been the case.
Financial Express data suggests annual volatility for the MSCI Indonesia index was 42.68 per cent, set against an annual return of 22.95 per cent.
Compare that with the far lower volatility of 20.46 per cent for MSCI Malaysia against annual return of 19.85 – ie, not far off its neighbour. However, over the past decade Indonesia has still done better on this basis. Annual return averaged 14.22 per cent with volatility of 38.53 per cent, against return of 2.3 per cent and volatility of 28.27 per cent for Malaysia.
Thus, one could argue that the long term investor in the country has not necessarily had to take on much more risk in order to get superior returns against other markets nearby.
Unfortunately, it is not all that easy to buy into the country via country specific funds – beyond exposure gained through broader regionally focused ones.
Filtering out those with less than a 50 per cent weighting to the country leaves just seven to consider. One of these is Aberdeen’s US listed closed ended Indonesia fund, which came to it by way of the purchase of Credit Suisse assets earlier this year.
What is noteable is investors will have to look to the offshore funds universe. Ignoring the country on that basis would, though, be missing a number of points. Indonesia is one of the world’s most populous countries; it is next door to one of the strongest growing OECD members – Australia, which raised interest rates for the second time in two months last week – and serves as a resources provider for big importers such as China. The country’s GDP is projected by the IMF to grow 4 per cent in real terms through 2009, and 4.8 per cent in 2010.
Dhananjay Phadnis, manager of the Fidelity Indonesia fund, outlined two key changes in a recent note. The currency has appreciated, helped in part by rating agency Moody's upgrade to the country's sovereign debt by one notch to Ba2. The other was the re-elected government taking office in October, with promises of employment generation and infrastructure development leading Phadnis to increase real estate exposure.
"The Indonesian stock market does not look cheap in the Asian context, however, the lowering of input prices due to a strong rupiah and a recovery in demand will likely provide scope for earnings to surprise on the upside when companies report their third quarter performance," Phadnis wrote.
