As we look ahead at the trajectories of Asean nations coming out of the pandemic, which markets, and which sectors will make solid investments? Fidelity’s Portfolio Manager, Madeleine Kuang, discusses the drivers and opportunities that make Indonesia an attractive market for entry.
Indonesia lies at the heart of the Asean investment narrative. It is an emerging market with strong demographic advantages – it is home to close of half of the population in Asean . With a GDP above US$1.2 trillion, a pro-reform government, many of the structural growth trends in the region can be found in the Indonesian economy.
Like many of its neighbours in the Asean region, Indonesia’s approach to tackling Covid-19 was cognisant of the realities of its people. The country did not adopt strict and complete lockdowns, but instead opted to enforce partial and micro lockdowns as well as social distancing rules while allowing certain business activities to continue.
This has been crucial to supporting segments of the population in the lower income groups that would have otherwise been vulnerable to a complete stalling of economic activity. This meant that the severity of the economic downturn from the pandemic was more benign than regional Asean peers, and Indonesia remains well placed for resumption of economic activity. This then begs the question, where can investors find the best entry points into the country’s market right now?
A rising middle class drives a long runway for growth
Indonesia is characterised by a large population but an under-penetration of goods and services, ranging from financial services to consumer goods.
Take Indonesian banks for example – the top banks in the sector are among the highest returning lenders in the Asean region. These best in class lenders are well-managed by teams that have experienced the Asean financial crisis, the global financial crisis and are now steering these businesses through the unexpected Covid-19 pandemic. Having delivered impressive returns across economic cycles, they are set to continue to drive sustainable asset growth, with still a sizeable unbanked population.
While financial service under penetration is one of the better-known narratives in Indonesia, there are many other sectors that share the same prospects and growth trajectories given shifting lifestyles. These range from increasing health care demand, higher spend on home improvement (benefitting tile and sanitaryware manufacturers), growing allocation to sportswear, and to changing consumption patterns in personal care products. These are but a few examples of diverse segments where there is a lot of room to increase per capita consumption spend in Indonesia. And as consumption choices are increasingly driven by upgrading on quality and higher convenience, this will also allow companies to drive premiumisation and further earnings growth.
Indonesia going digital
Covid-19 and Indonesia’s tech savvy young population have helped to accelerate the pace of digital adoption in the country. In 2020, we witnessed a tremendous increase in the take-up rate of digital-based services. 40 Million new users joined the internet in 2020 alone in the Asean region compared with an addition of 100 million in aggregate between 2015 and 2019. Meanwhile, in Indonesia, on average 1 in 3 of all digital service consumers during the year were new to the service.
There are not only opportunities in companies who are the bedrock of this new digital economy (from e-commerce players to ride hailing – food delivery super apps), but also companies who have adapted quickly to roll out solid digital strategies. Such winners adopt technology in serving customer needs, streamlining and expediating backend processes, and using data to extract value.
The advance of Indonesia’s digital economy has also resulted in a similar jump in telecommunications demand. However, the reality is that there is still a significant need to improve connectivity, density and quality of services. Telecommunications firms will have to invest in networks for 4G and to upgrade to the next generation 5G technology. There are good opportunities to be found here in the telecommunication sector, as companies will look to consolidate, invest and grow in this sector.
Sustainability to the fore
Over the years, I have seen a strong increase in the focus brought by companies to the matter of sustainability. Many have done a lot of work to issue formal policies and communicate the initiatives being taken in this direction and this is a positive development. There is now not only considerable emphasis by corporates on sustainability issues but also intentions to integrate these principles into long-term strategy.
Clean energy is an important space to watch here. Indonesia is going to play a significant role in the electric vehicle (EV) battery value chain given its vast mineral resources and plans to attract leading battery and EV makers to invest in the country. This will lead to a range of opportunities that could be potential beneficiaries of the pivot to green. The government is focused on developing this EV battery value chain where Indonesian SOEs will have an important role to play.
I believe that there is a tremendous potential to generate alpha based on an investment process that focuses on sustainability, so this is a key focus for me no matter what sectors are in question. I’m optimistic that we will see a growing pool of opportunities in this space in Indonesia in the coming years.
As the fourth largest population in the world, a rich resource base and a strong demographic advantage, Indonesia will be a significant contributor to global growth. Given there are several supporting pillars for the structural growth opportunity, it is an attractive universe for a disciplined long-term investor.