Tuesday, January 11, 2011

BW: The BRIC Debate - Drop Russia, Add Indonesia?

Long time readers will have a giggle out of the headline since that thought was on FMMF's pages long before it hit BusinessWeek!  Back in summer 2009 I wrote:

So perhaps we are looking at IBRIC? Or BRICI?

That said, I never was able to catch the tail on the donkey named Market Vectors Indonesia ETF (IDX) as the only true pullback it had in 1.5 years (last May), I missed my limit order by a few dimes.  Clearly it would have been far better to just buy the very extended chart in May 2009 around $40 and take the ride, but we are always so much smarter with the ability of 20/20 hindsight.  Probably one of my biggest regret's the past 2 years was not once catching this train.

However at this point the Indonesia market is expensive, despite the long term positives.  And Russia is actually quite cheap after doing little the past year, especially if oil stays above $90 for the foreseeable future.  (this is very much a resource driven economy)*   Hence, the BusinessWeek article is one of those short to intermediate term contrarian indicators from this seat at least (even if I agree in the long run).  The media is offering it is time to chase into one of the hottest markets of the past 2 years.... probably just like most media outlets were saying you must get into China (down in 2010) or Brazil (flattish) about a year ago.  Then again the S&P 500 added Netflix (NFLX) and F5 Networks (FFIV) after multi 100% runs in 2010, so performance chasing is the rule amongst humans.  Most likely Indonesia is set for a period of near term consolidation much like those 2 BRIC highfliers had in 2010.

*Due to "government" issues Russia is not exactly my favorite long term investment. 

Via BW:

  • Goodbye BRIC, hello BIIC?  In 2001, three years after Russia's ruble collapsed, Goldman Sachs named the country a member of the BRICs—Brazil, Russia, India, and China—the emerging markets it said would be four of the most dominant economies by 2050. Over the next several years, BRIC-fixated investors piled into Russia as its resource economy thrived in the era of fast-rising oil prices. 
  • For plenty of money managers and economists, however, the Russo euphoria is all but gone. From Nouriel Roubini to Morgan Stanley, they are calling either for Russia to be ousted from the BRICs altogether in favor of Indonesia or, at the least, for Indonesia to join the other four. They are put off by the policymaking drift in the Kremlin, Russia's demographic atrophy, and endemic corruption
  • Indonesia's fiscal prudence, economic growth—6 percent this year, according to the International Monetary Fund—and strengthening social and political institutions have far more appeal. Twice-elected President Susilo Bambang Yudhoyono has directed funding toward schools and health care, and Indonesia's coffers are full enough to put the onetime IMF bailout case on the brink of an investment-grade credit rating. (the other advantage is Indonesia is not export driven, so is much more of a self sustaining organic economy)
  • "Russia is just not a good place to put your money," says Richard Shaw, managing principal of QVM Group, a South Glastonbury (Conn.) investment advisory.  Shaw says he avoids putting clients in Russian stocks and funds, and steers clear of BRIC-linked investments because of their Russia exposure. He would rather own Indonesian exchange-traded funds: "While Indonesia isn't a paragon of virtue, it's better, especially to participate in the Asian boom."
  • Indonesia, the world's fourth-most-populous country and largest Muslim democracy, has corruption, too. In part, that's a legacy of the Suharto dictatorship that ended in 1998. 
  • Yet Tom Lydon, president of Global Trends Investments, says the Asian nation has more going for it than Russia. "Beyond natural resources, it is supported by improving domestic consumption, and anticorruption efforts appear to be working." Indonesia has sentenced several politicians and former ministers for corruption. 
  • In its latest Global Competitiveness Report, the World Economic Forum ranked Indonesia 44th out of 139 countries—up from No. 54 the prior year. (Russia came in at No. 63.)
  • While Morgan Stanley has called for Indonesia to join the BRICs—Goldman has called the country a "Next-11" nation, in a runner-up list of sorts—economist Nouriel Roubini of New York University has argued that Indonesia should replace Russia in the bloc. "From an American perspective," he wrote last year in a column, "Indonesia is an attractive alternative to Russia, which has vied with Venezuela for leadership of the 'America in decline' cheering section."
  • 12 years after its financial crisis the archipelago is China's third-largest trading partner, foreign investment has more than tripled since 2004, and gross domestic product is growing faster than Russia's. 
  • While Russia's Micex index has fallen 22 percent from its December 2007 peak, the Jakarta Composite Index is approaching an all-time high. 
  • Russia's market fortunes have fallen so low that some investors are taking a second look, especially since Russian corporate profits have been robust. "Russia really stands out as being cheap and attractive," says Maarten-Jan Bakkum, an emerging-market equity strategist at ING Investment Management in The Hague.
  • Indonesia's supporters say that over the long haul the Asia nation has the edge. More than half of the population is under 30, while aging Russia faces a paucity of productive labor. The Kremlin may have to commit increasing sums to care for the elderly, says Wijayanto, managing director of the Paramadina Public Policy Institute in Jakarta. "Indonesia," he says, "has the potential to become a key global player."

[May 22, 2009: Indonesia: A Must Own Emerging Market]
[Jul 9, 2009: Indonesia's Star Continues to Rise on Back of Yudhoyono's Re-election]  
[Aug 10, 2009: Indonesia Expands at Fastest Pace in Southeast Asia]
[Jan 22, 2010: FT.com - How the BRIC was Born]
[Apr 1, 2010: Indonesian Market Continues to Star in 2010 - Market at All Time Highs as Country Opens Itself Up Further to Foreign Investment]
[Aug 8, 2010: NYT: After Years of Inefficiency, Indonesia Emerges as an Economic Model]
[Oct 9, 2010: [Video]  CNBC's Tim Seymour & Team - The Prospects of Indonesia]

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