One New Way to Invest in Indonesia (IDXJ)

If there’s one country I’ve been consistently bullish on during the last five years, it’s Indonesia. When I speak at investment seminars and discuss Indonesia, you can see the eyes widen and the pens picked up to jot down notes.

I think it’s because Indonesia is so far off the radar screen. Most people just have a vague idea of a group of islands near Australia.

The country actually spans on area from east to west longer than America. Its land mass is three times the size of Texas and equal to the size of Greenland. While on the board of the Asian Bank in Manila, I explored the country from tip to tip, and was amazed at the beauty, resources, potential and the people of Indonesia.

With a population of about 250 million, Indonesia is the fourth largest in the world and the planet’s fastest-growing middle class. Java alone has 124 million people in a land area the size of the state of New York. And many of these citizens are plugged into the global economy. Indonesia is the third-largest user of Facebook after the United States and the U.K.

Once a member of OPEC, Indonesia has ample natural resources and is a major exporter of natural gas, rubber, palm oil and coal, and is home to 30% of the world’s rainforests.

With all this good stuff, why doesn’t Indonesia get more attention from investors or the media?

The key to unlocking Indonesia’s mystery is to remember how hard it was hit by the 1997 to 1998 Asian financial crisis. This trauma, coupled with a move to a democratic form of government, has since led to much better fiscal policies and attracted much needed capital.

It may surprise you that Indonesia is the only one of the 20 largest economies in the world (G-20) to have a budget in balance and a declining debt to GDP. No wonder its debt was upgraded to investment grade last year.

All of this has also been good for its stock market. Over the past decade, it’s been the second-best performer amongst emerging markets, powering ahead with an average annual return of 25.2%.

Like some of the countries I follow in the Pacific Rim, the chief challenge is to find ways to capture the growth and returns. There are only two Indonesian companies that trade on the NYSE or Nasdaq, and a couple dozen Indonesian “pink sheet blue chips” I follow that trade over the counter (OTC).

The Aberdeen Indonesia Fund, Inc. (AMEX:IF) has been a favorite of mine, and there’s also the Van Eck Indonesia ETF (NYSEArca:IDX). These funds favor the biggest companies in Indonesia.

So you can imagine my glee in seeing Van Eck come out with its new Small Cap Indonesia ETF (NYSEArca:IDXJ). It’s a basket of 27 companies with an average market value of $688 million. These are the companies growing at a faster pace than the big boys with the flexibility to turn on a dime. The top 10 companies represent more than 50% of the baskets value.

Like any emerging or frontier country, Indonesia has its challenges, such as corruption and infrastructure. Fifty million people don’t have access to power and 50% of Jakarta’s 10 million people don’t have running water.

I see these as opportunities going forward. Blend some of this new Indonesia small-cap fund into your portfolio, but don’t forget your trailing stop to protect yourself.

Good Investing,

by Carl Delfeld, Investment U Senior Analyst

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