Indonesia and Turkey Beat Investors’ Expectations by Outperforming BRICs

Michael Patterson | August 09, 2010

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Jakarta. Indonesia and Turkey are outpacing the biggest emerging markets by almost any financial measure, even while they may be too small to join the BRICs.

Indonesia’s equity index has climbed 21 percent this year and Turkey’s rose 13 percent, both hitting all-time highs on July 29.

Credit-market rallies sent yields on the nations’ foreign-currency debt to the lowest levels on record, JPMorgan Chase’s EMBI Global gauges show.

The MSCI BRIC Index of shares in Brazil, Russia, India and China is still 42 percent below its peak after losing 1.2 percent this year.

Less than two years after the global financial crisis prompted concern Indonesia and Turkey would default, investors are betting lower debt, growing populations and rising profit will spur economic expansions that led Goldman Sachs Group’s Jim O’Neill to promote the BRIC nations in 2001.

While China’s gross domestic product is about 4.2 times Turkey and Indonesia’s combined, they lead the “Next 11” smaller emerging nations with the most potential to affect world growth, O’Neill says.

“There’s a paradigm shift in the way both countries have been governed and in terms of economic performance,” said Amer Bisat, a former International Monetary Fund economist who helps oversee more than $1 billion at hedge-fund Traxis Partners in New York.

Indonesia and Turkey are “large, extremely systemically important and stable,” he said. “The market is looking at them in a very different light.”

The largest emerging-market stock mutual fund managers, which oversee about $250 billion, boosted their holdings in Indonesia and Turkey to the top “overweight” positions among 21 markets in June on expectations the gains will continue, data compiled by Cambridge, Massachusetts-based EPFR Global and JPMorgan of New York show.

The fund managers are increasingly optimistic as profit growth outpaces share prices in both countries, leaving the Jakarta Composite Index and ISE National 100 Index trading at price-earnings ratios about 20 percent below their pre-crisis peaks, according to Bloomberg.

Mark Mobius, who oversees about $34 billion as the Singapore-based chairman of Templeton Asset Management, said last month by e-mail that he planned to increase holdings of stocks in Turkey, where the firm already has more than $1 billion invested.

In June, he blogged that Templeton has a “positive take on investment opportunities” in Indonesia, while Antoine van Agtmael, chairman and chief investment officer of Emerging Markets Management in Arlington, Virginia, said on Bloomberg Television that the country was the most attractive among Southeast Asian markets.

The bullish bets are a turnaround from 2008, when investors shunned Indonesia and Turkey as the global economy fell into the worst recession since World War II.

The JCI and ISE both sank more than 50 percent, the nations’ currencies weakened at least 15 percent against the dollar and credit-default swap prices suggested a 66 percent chance of default for Indonesia and 52 percent odds for Turkey, Bloomberg data show.

Indonesian stocks are becoming more expensive relative to other developing markets.

The Jakarta gauge trades at 13.5 times analysts’ estimates for earnings over the next 12 months, near the highest on record relative to the MSCI Emerging Markets Index, which is valued at 11.2 times, according to data compiled by Bloomberg since 2006.

The MSCI BRIC gauge has a ratio of 11.

Turkish stock valuations factor in the nation’s political risks, while Indonesian companies have shown they can surpass analysts’ earnings projections, according to Martial Godet, who helps oversee more than $60 billion as the Paris-based head of emerging markets at BNP Paribas Investment Partners.

The ISE is valued at 9.6 times analysts’ profit forecasts for the next 12 months, a 14 percent discount to the MSCI emerging index, and companies in the JCI have beat analysts’ profit projections during the past five quarters, data compiled by Bloomberg show.

“The momentum is good for both markets,” Godet said. “They are not mainstream investments so people will continue to add money. In both cases we have populated countries that are growing very well.”

President Susilo Bambang Yudhoyono oversaw economic expansion of at least 4 percent throughout the global recession.

That helped the JCI jump 175 percent from its 2008 low to 3,060.59 on Aug. 6, about 1.2 percent below the all-time closing high of 3,096.82.

The stock benchmark closed up 0.7 percent on Monday, while the MSCI Emerging Markets Index climbed 0.4 percent to its highest in more than three months.

Indonesia’s $540 billion economy is expected to grow 6 percent this year, fueled in part by rising consumer spending among the nation’s 237 million people as well as rising commodity prices, according to estimates from the Washington-based IMF.

The rupiah has surged 41 percent from its 2008 low and is trading at the strongest level versus the dollar since June 2007.
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