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Indonesia has potential, but the right policies are not in place. Indonesia suffers from high inflation and poor infrastructure. If Indonesia gets its act together, the Indonesian stock market will do as well as the Indian stock market. By Jay Smith A decade and half ago, Goldman Sachs economist Jim O’Neill predicted that the economies of Brazil, Russia, India, and China would play a much larger role in the global economy than they did before. At the time, China, India and Brazil were minor players in an economic world dominated by Europe and the United States. Now, O’Neill’s prediction has more than came true, as the BRIC economies have grown, driven demand, and created many alpha investment opportunities. Now Jim O’Neil also has a new prediction, that Mexico, Indonesia, Nigeria, and Turkey (MINT) will be the next countries to develop quickly and drive demand. Of the MINT countries, Indonesia looks particularly attractive. Indonesia is the fourth most populous country in the world, with 250 million people. It has great demographics, with the median age being just 29.2 years and a total dependency ratio of 51%. Indonesia also has strong growth potential, with a GDP per capita of just $3,400 versus the global average of over $10,000. Jim O’Neill originally left Indonesia out of the BRIC countries because he didn’t think that the Indonesian government was doing enough to realize its potential. Now O’Neill believes that Indonesians are asking the right questions about what they can do to accelerate their growth. Because they have been asking the right questions, Indonesia’s growth has increased, with the country growing GDP at 6.2% in 2010, 6.5% in 2011, 6.3% in 2012, and 5.8% in 2013. Inflation has been a problem, however, with inflation rising from 4% in 2012 to 7% in 2015. Inflation is why shares of Indonesian ETFs such as the iShares MSCI Indonesia ETF (NYSEARCA: EIDO ) have not done well in dollar terms. The iShares MSCI Indonesia ETF is a passive ETF that tracks the MSCI Indonesia Investable Market Index. It has an annual expense ratio of 0.62%. Bank Central Asia (OTC: PBCRF ), Telekomunikasi Indonesia (NYSE: TLK ), Astra International (OTCPK: PTAIF ) are its top three holdings. Since its inception, the iShares MSCI Indonesia ETF has averaged an annual return of 4.57%, lower than the S&P 500’s return. Even worse, the ETF has averaged an annual return of negative 2.45% in the last 3 years. At the current moment, iShares MSCI Indonesia’s fundamentals are unattractive, with an average PE ratio of 21.35 and an average price to book ratio of 4.92. Performance will remain weak for a few more quarters, as rising treasury yields prompt capital outflows from emerging markets. Capital leaving Indonesia will increase inflation by weakening the rupiah. In the long run, iShares MSCI Indonesia ETF has potential because Indonesia will put the right policies in place one day. If it adopts the same policies and infrastructure building program as India did a few years ago, Indonesia’s stock market will rally like the Indian stock market has. Moreover, many hedge funds also own the iShares MSCI Indonesia ETF’s largest components. AQR Capital Management and Jim Simon’s Renaissance Technologies both own Telekomunikasi Indonesia . DE Shaw owns the stock too. Our research shows that the 15 most popular small-cap stocks among hedge funds have outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012. These stocks managed to return more than 132% over the ensuing 2.5 years and outperformed the S&P 500 Index by nearly 80 percentage points . The hedge fund ownership of Indonesian stocks is a good sign. The iShares MSCI Indonesia ETF is not a buy yet, but it should be on the watch list. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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