Gabriel Sacks, Co-Manager, abrdn Asia Focus plc
Trawl the internet for Indonesia’s most famous tourist attractions and the chances are you will soon be linked to a Komodo dragon. At least for faint-hearted visitors, whether such a creature truly qualifies as an “attraction” could be a moot point.
Komodo dragons are the largest lizards on Earth. Males can grow to nearly 10 feet in length. They have 60 serrated teeth, armoured scales and a forked tongue. Capable of devouring as much as 80% of their body weight in a single meal, they have been known to dig up and feast on human corpses.
Fortunately, the attractions of Indonesia for investors are rather more obvious. Barely a decade after being labelled “fragile”, the country is rapidly establishing itself as one of the Asia-Pacific region’s economic powerhouses.
Many of the key elements of this transformation are discernible from afar. They include an abundance of natural resources, a young and sizeable population, a burgeoning middle class and relative political stability.
Yet the real scale of Indonesia’s long-term potential can in many ways be appreciated only at first hand. As those of us who have spent considerable time “on the ground” know, there are even more opportunities than might first appear – particularly among smaller companies.
Positioned for growth
It is a little over a decade since Indonesia was lumped with India, Brazil, Turkey and South Africa to create the so-called Fragile Five. Coined by a Morgan Stanley analyst, the term was used to describe a group of emerging markets (EMs) thought to be at serious risk from their heavy reliance on foreign investment.
Each of these economies was running a hefty current account deficit, financed by inflows of overseas capital. Each was highly susceptible to the whims of international investors and especially vulnerable to rate hikes and the reverse of quantitative easing in the US. Imminent elections in four of the Fragile Five introduced even more uncertainty.
In Indonesia’s case, however, going to the polls proved a positive turning point. Businessman Joko Widodo – popularly known as Jokowi – became president in 2014 and duly embarked on a series of reforms that have since condemned the “fragile” tag to history.
Employment, incomes and confidence have all been raised in a nation whose demographics are notably conducive to long-term growth. Standing at 280 million, the population is among the biggest and youngest in the world.
The commodities boom that followed the COVID-19 pandemic has also benefited
Indonesia, which is now a major exporter of the metal ores vital to the global transition to lower-carbon fuels. In tandem, Jokowi’s government has focused on far-reaching objectives such as infrastructure development, supply chains and value-added manufacturing.
Smaller companies: the hidden gems
All this has substantially boosted Indonesia’s profile in investment circles. As with many EMs, though, the fact that opportunities exist across the market-capitalisation spectrum remains comparatively unacknowledged.
This is because smaller companies are routinely under-researched. The situation persists even though such businesses are often better equipped than their larger counterparts in terms of initiating or responding to new trends.
Our own engagements in Indonesia have shown many of the small-cap and mid-cap firms that repeatedly fly under investors’ collective radar are defined by a capacity for innovation and expansion. In turn, this can translate into outperformance over the long term.
Take AKR Corporindo. Founded as a chemical-trading company in 1977, it has become a leading distributor of chemicals, fuels and lubricants, as well as a provider of logistics and transport services in a country where logistics accounted for a colossal 23.5% of GDP – the highest in Asia – in 2023. It has an enviable infrastructure set-up, a young and growing workforce, sound management, competitive advantage in the geographic spread of its facilities, a healthy dividend and a market capitalisation of around $2 billion. We see it as a good proxy for the growth of Indonesia in general.
Medikaloka Hermina, one of Indonesia’s biggest hospital chains, is another interesting example. Established in 1999 and headquartered in Jakarta, it operates 47 hospitals in Java, Kalimantan, Sumatra and Sulawesi. It is uniquely positioned to take advantage of low healthcare penetration and the rollout of universal health coverage in Indonesia under the Jaminan Kesehatan Nasional (JKN) scheme. In spite of being an important player in the healthcare sector of one of the world’s most populous markets, it is practically unknown to foreign investors – even though one of Indonesia’s top conglomerates has taken a stake in the business. Its market capitalisation is approximately $1.25 billion.
Seeing what others do not
The point here is that a genuine on-the-ground presence can go a long way towards unearthing opportunities of this kind. It can help an investment team identify smaller yet highly promising companies that would otherwise be overlooked.
The same applies throughout much of the Asia-Pacific region and to EMs more broadly. We feel there is invariably a lot to be said for getting to know the places, people and businesses in which we invest.
It is widely recognised, of course, that these are some of the world’s fastest-growing markets. Yet investors need to understand the extent to which hidden gems – in the form of small-caps and mid-caps – are the engines of growth.
Ultimately, the challenge is to see what others do not – which brings us back to Komodo dragons. Is there anything remotely appealing lurking beneath their terrifying appearance and unsettling behaviour?
Indonesians undoubtedly believe so. Not least on the islands where they live, the dragons are revered as symbols of power and strength. Perhaps it is time for investors to view some of the country’s smaller companies in a similar light.
Company/Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
Important information
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