The “Fifth BRIC”

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This place isn’t on most investors’ radars…yet. But that will change soon.

This country:

  • Is a member of the 20 wealthiest nations on earth: the G-20
  • Is the world’s third largest democracy, after India and the US
  • Has the world’s fourth-largest population of 240 million people
  • Has a stock market that has gone up nearly 44% in the past year
  • Has doubled its economy in the past five years

The place I’m talking about is Indonesia.

You’ve heard of the BRIC economies – Brazil, Russia, India and China. These are the “big guns” in the emerging markets world.

Jim O’Neil, a well-known Goldman Sachs analyst came up with the term back in 2001 in a paper titled “The World Needs Better Economic BRICs.” O’Neil’s point: The BRICs would become the world’s four dominant economies by 2050.

Think of Indonesia as the “fifth BRIC.” Indonesia is slightly smaller than Mexico. Or about three times the size of Texas. The bulk of the population lives on just five major islands: Sumatra, Java (the location of the capital city Jakarta), Sulawesi, Borneo and New Guinea. But the country’s land mass is spread over an archipelago of 17,508 islands, of which about 6,000 are inhabited.

This string of islands is on a strategic location slap bang in the middle of major sea-lanes linking the Indian and Pacific oceans.

With a GDP of $521 billion, its economy is less than half the size of its nearest BRIC cousin. But it’s certainly big enough to invest in. It’s a well-diversified economy with sizable incomes from agriculture, natural resources and manufacturing. It’s also well situated between India and China. This means its exports should grow as these larger neighbors grow.

Indonesia also has a relatively stable government under Susilo Bambang Yudhoyono. And although levels of corruption are still too high for comfort, it is recognized to be less corrupt than BRIC member Russia. In general the trend is for less corruption over time.

According to The Economist, Indonesian GDP will grow by 5.9% next year. That’s almost three times the World Bank’s 2.4% estimate for the developed economies. And nearly three times the 2.5% forecast for the US (which by the way, looks optimistic).

More important, this growth is being driven by the private sector, not by government spending. In Indonesia, the private sector accounts for roughly 90% GDP.

Also, Indonesia is well isolated from the weak economies of the US and Europe. Only 11% of its exports go to the US. The bulk of the other 89% go to Asian nations. This is another reason to have confidence in the country’s future prospects.

There’s more good news on the consumer-spending front, too. Over the past five years, the average income has doubled to $2,350 a year. And a report by Deutsche Bank predicts that figure can rise another 50% by the end of next year.

Despite this income growth, Indonesia still has the lowest unit labor costs in the Asia- Pacific region. This has attracted manufacturing activities from China. Employment growth is critical, because half of Indonesia’s population is 25 years old or younger.

This means the workforce as a portion of total population will rise over the next 20 years. This should further increase the country’s consumption levels and fuel further economic growth.

But before we move on, I want to flag three risks associated with Indonesia.

First, there will be a change of president in 2014. A shift away from the reforming agenda of the current administration would be negative for investments.

Second, if big international investors get spooked by emerging markets, Indonesia could suffer badly. But it’s important to remember that any turning away from the emerging markets usually only lasts for a short time.

A good example of investors getting spooked (big time) is the recent financial crisis following the subprime mortgage meltdown. Between February and November 2008, the MSCI Indonesia Index fell 72%, measured in US dollars.

Of course, the crisis had nothing to do with Indonesia. Investors everywhere were simply panicking and selling indiscriminately. But (and this is a big but) the index then came roaring back. It’s now up 319% from its lows in November 2008. If you’d bought at the pre-crisis peak and held on, you’d still have made 17% on your investment, measured in US dollars

Serious investors shouldn’t worry too much about this kind of illogical, short-term market volatility. In fact, if this kind of panicked selling happens again, I’d be recommending you invest more into Indonesia (plus a lot of other places).

Third, Indonesia runs along an active fault in the Earth’s crust. There are quite regular earthquakes and volcanic activity. From time to time this activity can produce major natural disasters. The most infamous recent example was the 2004 tsunami, when a huge undersea earthquake off the west coast of Sumatra triggered the massive waves that pounded parts of Thailand and other countries in the region.

However, despite the omnipresent risks of investing in Indonesia, the country’s stock market has been performing brilliantly. The MSCI Indonesia Index has gained 26% a year over the past 10 years, measured in dollars. This investment performance means that the Indonesian stock market has been one of the strongest in the world over the past decade, considerably outperforming all of the BRICs, as well as the loss-making US stock market.

You would have gained 893% if you’d invested in Indonesia over the last 10 years, measured in dollars. In and of itself, that’s a remarkable run…all the more so when compared to the S&P 500’s 15% decline over the same period. Investors looking to capture the upside of the emerging market megatrend, therefore, would do well to look toward the “Fifth BRIC.”

Regards,

Rob Marstrand
For The Daily Reckoning Australia

Rob Marstrand
Rob Marstrand worked for UBS for 15 years, mainly in corporate strategy, before escaping the banking world and moving to South America. His ex-employer was the largest global wealth manager and world's biggest stock trader. The strategy job involved all areas of the business in all parts of the world. Reviewing current businesses, developing entry strategies for new businesses and countries, and working on acquisitions and joint ventures. This work involved detailed review and valuation of competitors and takeover targets. Rob lived in Hong Kong, China from 2002 to 2005, where he was particularly involved in negotiating joint ventures and acquisitions in China. He has also worked on projects, acquisitions and joint ventures in Japan, India, Saudi Arabia, the US, Switzerland, Indonesia and South Korea, amongst others. He is British, married to an Argentine wife, and emigrated to Buenos Aires, Argentina with his wife and two children in 2008.
Rob Marstrand

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54 Comments on "The “Fifth BRIC”"

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masalai
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We now have a BRICI and Australia hangs off the “apron strings” … It would be wise for Australia to seek closer ties there at the expense of USA and Europe if necessary as they will be “dead ducks in the water” and a potential hindrance soon enough…

Chris
Guest

A world where the USA and Europe are ‘dead ducks’ as you put it will be a scary place indeed. With the Chinese grossly overreacting to every minor issue that arises, it appears that statesmanship will become a thing of the past – and that is not good for Australia, Indonesia or anyone else.

Ned S
Guest

It wasn’t the Chinese who invaded Afghanistan and Iraq Chris. And if the US had Chinese troop buildups sitting as close to them as US troop buildups are to the Chinese, some real ‘overreacting’ would be going on. Plus little things like the US feeling the need to site a bunch of missiles in Poland to keep its NATO allies ‘safe’ from Iran don’t have quite the ring of authenticity with me that they might with others?

Chris
Guest

The Chinese might be unhappy about build up of US troops, but (this time) the Japanese and Vietnamese (and others) are more than happy to have their presence.

If you haven’t been to China already, I suggest you visit the country, chat to some locals and learn what life under a authoritarian regime with no free media and endemic corruption does to a population.

Ned S
Guest

China isn’t losing the trade war Chris. It isn’t the country that is looking at its standard of living going backwards. Nor its position in the world. Not saying I’ve got any reason to trust China. But I surely do know that I’ve got none to trust America.

As to Japan – They must have changed their minds recently. Because a year ago or less, they were certainly sounding happy enough to bid the marines ‘Sayonara’.

Chris
Guest

As for the Japanese, events of the last few months may help them ‘rediscover’ where their interests actually lie.

As for trusting the US, I’d rather deal with a country with the separation of powers and the rule of law any day.

Ned S
Guest
“events of the last few months may help them ‘rediscover’ where their interests actually lie” – And if one is as skeptical about America as I am, I’d be having a real good close look at just what the US might have done to engineer such a situation. They have lots of ‘form’ in relation to such happenings. It is a nation that is run by and for extremely powerful and obviously corrupt self interest groups. Not that their ‘free’ media seems real big on getting that point across to the general population. Nor does their ‘rule of law’ seem… Read more »
Aldo
Guest

The story has great merit and no doubt that Indonesia is a possible fifth BRIC, however Rob consistantly talks of the returns in terms of US dollars and we all know that the USD has had a remarkable retreat in value over recrnt times. I am sure that the return in terms of other more stable currencies would not be so attractive, albeit, probably, still interesting.

Ned S
Guest

Did anyone else see the article recently where Russia reckons it’s going to do away with Windows software? And that the total cost will be RUB 150 mill (namely USD 5 mill) – What a hoot! : :D

http://www.pcworld.com/businesscenter/article/209154/what_your_business_can_learn_from_russia.html

Biker
Guest

Why so funny, Ned? My kids were programming in Linux at 10 and 12. Macs use Unix. Very stable software which countless corporations have switched to in the past decade. Has many other advantages, including reducing the Blue Screen of Death… . :D

Ned S
Guest

Billy Gates will die in the bum. Microsoft is one of the pillars of American IP mate. Right up there with Goldman (cooking up their crooked financial deals), and Coca Cola (trying to replace Chinese herbal tea), and Big Macs (trying to replace Russian borsch), and Johnson and Johnson (trying to replace lots of ‘unmentionables’), and GE trying to do whatever the EFF they think they are trying to do? Plus a lot more of similar ilk.

The Americans have NO idea just how fragile their economy really is I suspect? I remain an interested observer … ;)

Chris
Guest

“staying home and minding their own business”??

Ned, stop embarrassing yourself.

Biker
Guest

Gates has a ski chalet less than a hundred metres from our friends’ place in Whistler, BC, Ned. Nice spot. Saw a coyote in full winter coat trotting along a few metres from our front door. Had picked up the scent of Bob’s schnauzer and was looking for fast food, we figure.

Kept a lookout for Bill (Winter Olympics and all) but never spotted him.
I figure Microsoft has significant market share and their dominance may last another decade or so. How much money is too much, anyway??!~

Biker
Guest
Chris, you’d have to admit the US has exercised a sometimes questionable presence where it wasn’t welcome. Ned’s point is that the US has unquestionably been the most active military force in the world for the last six decades. Some of its interventions have been foolish, expensive in terms of human life… and highly counter-productive. China may or may not evolve as a threat. But, as Ned comments, you simply cannot compare China’s global militarism to that of the USA. How we view that continual military presence abroad [world policeman(?) or warmonger(?)] depends on not only cultural but economic perceptions.… Read more »
Ned S
Guest
Let’s get some history straight Chris – Who really won WWII – As in being the “salvation of European civilization”? : http://en.wikipedia.org/wiki/Battle_of_Stalingrad Who really flipped the Persians/Iranians over from being American allies to being American enemies? http://en.wikipedia.org/wiki/1953_Iranian_coup_d%27%C3%A9tat Who really were the Taliban’s allies back in the days when the American ‘free’ media called them Mujahideen Freedom Fighters? http://en.wikipedia.org/wiki/Mujahideen Etc, etc, etc … Our American brethren are and have for a very long time been a bunch of self serving low lifes. Good luck to them. But it just could be coming to an end? Which won’t break my heart. Even… Read more »
Ned S
Guest
“Ned, stop embarrassing yourself” – I don’t feel at all embarrassed Chris. Last comment got ‘moderated’ – Too many links is the only reason that occurs to me at this moment? So same follows with the http://en.wikipedia.org/wiki” bit removed from the front of each: Let’s get some history straight Chris – Who really won WWII – As in being the “salvation of European civilization”? : /Battle_of_Stalingrad Who really flipped the Persians/Iranians over from being American allies to being American enemies? /1953_Iranian_coup_d%27%C3%A9tat Who really were the Taliban’s allies back in the days when the American ‘free’ media called them Mujahideen Freedom… Read more »
Ned S
Guest

Too much ‘form’ Chris – Shute, the last global economic disaster emanated from them back in the 1930s even? Low life scumbags never to be trusted again in my lifetime or that of any younger person I can ever possibly influence. Out with the old; In with the new!!! Yahoo … And may circumstances Bless Oz in the Interim and Forever thereafter! ;)

Ned S
Guest

Then there was a Savings and Loan Crisis. And the Asian Financial Crisis which American ‘hot money’ was up to its neck in. Plus the USSR crashing and burning somewhere along the way. Then the ‘dot.com’ debacle. And now the US sub-prime disaster. EFF America for mine. Responsible holders of the global reserve currency? – Ha Ha, Ho Ho …

Jingle Bells,
Jingle Bells,
etc …

Ned S
Guest

Wonder if Iran will sell us some nukes? :D

Ned S
Guest

“Ned, stop embarrassing yourself” – Yunno, for a quite recent acquaintance, ‘Chris’ has a rather forward, albeit somewhat known and familiar way of attempting to disassemble my thoughts? I can only assume that the GBP/AUD is still going down? Never mind ‘Chris’ – I taste (as opposed to smell!) blood in the waters re the Oz housing market now too. So just maybe you’ll be able to afford to buy a house back here in 5 years? Providing Biker and I don’t buy them all up before you!!! :)

Ned S
Guest

Hmmm – The AUD/GBP is obviously a bubble? So it has to crash soon. But maybe it won’t? :D :

http://www.ozforex.com.au/cgi-bin/real-time-forex-charts.asp

Biker
Guest
Yes. This one line struck a chord: “Ned, stop embarrassing yourself.” You may well be right about ‘Chris’. We’re ambivalent about the Ozbuck (other than our travel needs); and simply curious about interest rates; but the rise or fall of Australian property is a passion we’ve long maintained. Looking back over the decades we recall similar periods when a lack of confidence resulted in similar plateaus, even minor falls. While cognisant of Don’s ‘history repeats itself until it doesn’t’ warning, the current situation in Australia seems almost identical to that of the eighties. One key criterion we use to judge… Read more »
peterg
Guest
US may be nominally the land of the brave and free, but as this article points out, without regulation, it will continue to boom and bust. http://globalresearch.ca/index.php?context=va&aid=21699 specifically “Note 2: The Austrian economists point out that it is bubbles which cause crashes. I agree. But as Professor Black points out, fraud is one of the main things which causes bubbles. ” the 2 ‘point out’ links were just google searches for site:http://georgewashington2.blogspot.com/ austrian bubbles site:http://georgewashington2.blogspot.com/ black fraud bubbles for my mind, an investigation into 911 would be a good start too. but that is way too off topic for DRA,… Read more »
Biker
Guest
“The Austrian economists point out that it is bubbles which cause crashes. I agree. But as Professor Black points out, fraud is one of the main things which causes bubbles. ” That’s widely acknowledged in the term, used even way back then: ‘liar loans’. Borrowers were liars, banks were liars and both knew this well. No-one worried about it, because, as everyone knew, the property would be either sold before it mattered; or its equity would appreciate, covering the shortfall. ;) Our banks, while also liars, at least practise less risk. Who knew the US rating agencies were also liars?… Read more »
Ned S
Guest
The greatest nation on Earth has totally destroyed its own creditability, all by itself, in a period of less than 5 years. It’s one hell of an achievement when one thinks about it. One point that still does concern me, is that its ultimate ‘out’, just could be to stir up a major war. From which it could a) make lots of money and b) save all its poor defenceless allies; Thus winning back lost brownie points. There isn’t much that I’d consider the US above these days unfortunately. :( But one can be damn sure, that unless they pull… Read more »
Biker
Guest

“The greatest nation on Earth has totally destroyed its own creditability, all by itself, in a period of less than 5 years. It’s one hell of an achievement when one thinks about it.”

Another major achievement is its utter inability to apprehend, let alone punish, the culprits, Ned!~ ;)

Ned S
Guest
With the inability of their general population to comprehend what the hell happened, let alone why, being yet another ‘major achievement’ Biker. It will be interesting to see what comes of it all though – As the creditability of the American Dream underlies a lot of their offshore success I suspect. When a Filipino starts looking at Coca Cola signs and thinking That stuff is franchised by a bunch of very bad people with their general population being losers, so I don’t want anything to do with it, the US is in REAL trouble. No way I’d ever buy any… Read more »
Biker
Guest
Creditability: Thought you’d coined a new term, there, Ned! Googled it and found it refers to ‘Credit Repair’. Not sure the greenback is repairable, but time will tell. There are some US products we still buy, but the majority of consumer items we purchase are Asian. One exceptional US product is the Minnkota electric outboard. Born in Minnesota / Dakota in the midst of the Great Depression (1934), it’s a classic example of American ‘enginuity’ (if you’ll excuse the pun.) Despite Asian attempts to copy this classic, it remains the enduring icon, the epitome of quality functional design: http://www.minnkotamotors.com/company/history.aspx Just… Read more »
peterg
Guest
it boils down to whether the corruption starts at home (silly people not taking responsibility for their own comittements), or from the top (a secret cabal of globalising dominators who care not for trashing nations as they proceed). no use having either free markets or socialism if the top banksters trash it all to enrich themselves at the expense of the many. its easy to be anti american, but we might well miss the ‘dream’, depending on what replaces it, and who is selling the dreams, and what we are not been told. what’s the ‘great dream of china’ I… Read more »
Biker
Guest

In Britain, five years ago, billboard advertising for borrowing against your home equity was rife. The banks actively encouraged this folly.

Far less by 2009, of course. By then a great deal of pain was evident.

Never noticed anything as blatant in the US, but institutionally, it must have been far worse… .

Ned S
Guest
PeterG: “its easy to be anti american” It’s still a good idea to take a look at Chris’ original comment: “A world where the USA and Europe are ‘dead ducks’ as you put it will be a scary place indeed. With the Chinese grossly overreacting to every minor issue that arises, it appears that statesmanship will become a thing of the past – and that is not good for Australia, Indonesia or anyone else.” That’s scaremongering – If you don’t barrack for the nice status quo as represented by the US and (presumably Western) Europe, then the evil Asian peril… Read more »
Biker
Guest

“….creditability being a pretty acceptable alternative under the circumstances apparently. :D ”

Thought it highly appropriate, in fact!~

Ned S
Guest
The KHR contains some stuff in Box 6.1 on Housing Affordability at the bottom of this link Biker: http://taxreview.treasury.gov.au/content/downloads/final_report_part_1/09_AFTS_final_report_chapter_06.pdfexternal link That last paragraph is particularly interesting: “While they may promote housing affordability, proposals that increase housing supply may reduce existing home values and change the shape of Australian cities in ways that many existing residents do not desire. This suggests a serious community dialogue is needed on the distribution and quality of housing across Australia. As a first step, the Council of Australian Governments should review zoning, planning and development approval policies and infrastructure charges to ensure they do not… Read more »
Biker
Guest

“…the Council of Australian Governments should review zoning, planning and development approval policies and infrastructure charges to ensure they do not unnecessarily reduce housing supply.”

Saying ‘Don’t oversupply’, in fact!

Interesting to see that the fed and state governments are seriously engaged in construction of public housing here… some big projects.
They seem to be catering mainly to: a.) very low income earners; b.) the elderly (ie., new residential care facilities). In both cases they’re managing, so far, to maintain aesthetics. Not our niche market(s), anyway.

Thanks for the link, Ned. I’ll scan it and print if there are any other gems like these.

Ned S
Guest

“…the Council of Australian Governments should review zoning, planning and development approval policies and infrastructure charges to ensure they do not unnecessarily reduce housing supply.”

Yes, the telling word could certainly be taken to be ‘unnecessarily’ … It’s a VERY high stakes game that is being played pretty obviously.

You’ve got ‘enough’; Your boys have time to wait ‘n see; I’m hedged – And the game goes on. No RBA rate rise tomorrow for mine.

Stillgotshoeson
Guest
Comment by Ned S on 1 November 2010: No RBA rate rise tomorrow for mine. I’m sitting on the fence.. Think it is a closer decision than other economists are calling (call is for 25% chance of hike) Forward pressures on economy still point to higher inflationary times.. RBA may want to preempt this and raise now and skip “Christmas Present” December increase and sit out again until Feb. Or they will be convinced Banks are going to move on their own with out a move from the RBA and hence substituting an RBA move to the upside. I am… Read more »
Ned S
Guest

One month at a time Shoes. But also suspect it isn’t all looking as rosy as our powers that be make out. Thus my call on interest rates for tomorrow. I’ll actually be VERY surprised if they raise them!

Ned S
Guest

What’s it been since the last rate rise – Huff ‘n puff aside – Seven months??? That’s a long time between drinks as a drinking man might opine? :)

Much talk ‘n minimal action sums up our poor belated little also ran type central bank in this country. Though I reckon they are doing as good as can be expected … It’s not been easy obviously.

Biker
Guest

“One month at a time Shoes.”
Hey, fair go, Ned. He did give us a year for ‘Oz Orfuls’: 2011.
Even his mentor, Shoeless, would hesitate to provide an exact month. ;)

Stillgotshoeson
Guest
Comment by Ned S on 2 November 2010: One month at a time Shoes. But also suspect it isn’t all looking as rosy as our powers that be make out. Thus my call on interest rates for tomorrow. I’ll actually be VERY surprised if they raise them! I won’t be surprised either way… One in November, Nothing in December, Nothing in November, One in December or one from the banks themselves at any point is possible. We have not had that “one rate rise” too many yet.. at some point we will The Australian economy will be strong, robust and… Read more »
peterg
Guest
on Chris’s duck theory, I agree the Chinese have to grow up (and out) in many ways and there is a fear factor, but I also have a lot of (unproven) goodwill to them. half their luck at least it ‘catching up’ and I must compare them to the lot that ‘we’ are. would be nice if the world could be assistive and more prone to peace. yeh, like the Tibetans. a plug here for Grand Designs Australia, not a bad show , maybe a few ideas for those who (on the show) cry poor, only having $400k or $900k… Read more »
Stillgotshoeson
Guest

Well it’s officila Ned is surprised :)

THE central bank raised interest rates to 4.75 per cent at its monthly board meeting today.

Now we wait to see which bank moves first if any…

Ned S
Guest

Yep, I lost that one alright – Sure hope they know what they are doing! (Is there an icon for ‘crossed fingers?) :)

Stillgotshoeson
Guest
Would not consider it a loss Ned… Still would have been a lineball decision as far as now or December.. Now what/which bank will move first… that’s the next question unanswered. I_NEED_ the banks to throw their little bit on the top before years end so my_FAR_OUT_PREDICTION for number of rate rises this year + banks moving above RBA moves and prices in Melbourne and Sydney stagnating and/or going backwards to be true.. ;) :) I mean this forum is all about being able to point fingers and go HA_HA_HA at our fellow contributors and saying HA_HA_HA the fool was… Read more »
Stillgotshoeson
Guest

CBA have moved…

Commonwealth Bank of Australia on Tuesday raised its variable mortgage rate by 45 basis points or almost double the 25 basis points increase by the central bank.

Ned S
Guest

And what might I ask are the rest of us (as in non WA types) supposed to make of this? :

http://www.abc.net.au/news/stories/2010/11/02/3055203.htm?section=business

Effectively the WA Premier reckons his state economy is OK so he’d appreciate it if the banks lend there. Hmmm … :D

Biker
Guest

“Well it’s officila Ned is surprised :) ”

Ah, Italianspeak. Can see now where the cosa nostra link originates. ;)

Biker
Guest

Politicians have no impact on banks, Ned. We have no issues with interest rate rises. We can generate over $80K annually on bank interest… and rate rises: a.) mean rents rise; and b.) stop construction in its tracks, limiting supply.

Barnett’s a good bloke… he means well… but banks have their own agenda. :D

Ned S
Guest

“banks have their own agenda” – They do at that Biker. As the RBA and Swanny just learned. Personally I’d like to see interest rates up around 10%. In a zero inflation world. With bank depositors being paid maybe 7.5%. But that’s a bit of a pipe dream given how much debt the world has gotten itself into. And the fact that inflation is intentionally targeted. Drift on Ned …

Biker
Guest

“As the RBA and Swanny just learned.”

Watch Hockey go for the jugular, now. And Brown & Co will back him, forcing Swan to overreact. We do indeed live in interesting times. ;)

Much more fun offshore all day, looking for bronzies and other ‘fryables’. :D

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