Emerging Markets   |   Nov 19, 2020

Thoughts from our Global Emerging Markets Team – Indonesia

Will new Indonesian reforms present a multi-year growth opportunity?

This is the first in a series of short articles that aims to identify key themes, opportunities and threats in emerging markets as we navigate this uncertain and rapidly changing investment environment. Much of the noise around emerging markets these days centres around global macro themes that, for reasons that make sense in the very short term, do not differentiate between countries, sectors and stocks in the asset class based on the success or failure of corporates to growth their earnings, or in many cases, even have any. The historically very strong correlation over most time periods in history between corporate earnings growth and stock market performance has partly and temporarily broken down, but our strong belief is that, as ever, this is just a temporary displacement.

Dominic Bokor-Ingram
Senior Portfolio Manager, Emerging and Frontier Markets

Historically, there has also been a very high correlation between country reforms and stock market performance through the mechanism of reforms promoting economic growth, and companies having a better potential earnings growth trajectory in countries that are growing strongly.

Reforms can occur at many levels and have been a catalyst for strong growth at some stage in every emerging market, and every developed market before that. Reforms as they affect stock market investors fall largely into three categories, political reform, economic reform and stock market reform. Individual country reform processes can encompass one, two or three of these categories as we have seen many times throughout emerging market history. The most high-profile example in modern times of all three categories dovetailing to create new investment opportunities has been the ending of communism in Russia and Eastern Europe. The changing economic model in the late 1990’s in China, whilst not as dramatic to the outside world, was arguably even more influential in driving returns for investors over the following 30 years.

An even more recent example would be the economic reform programme started in 2015 in Saudi Arabia, and termed Saudi Vision 2030, which included the opening up of the stock market to foreign investors for the first time ever.

As bottom-up investors in emerging markets we don’t trade these events from a macro perspective, but we would always rather have the strong tailwinds created by strong economic growth as a backdrop for our portfolio companies to flourish. We have recently seen another potentially game changing reform process in Asia begin to take shape and this note will outline the economic reform process in Indonesia and the strong potential for the recently passed Omnibus law to raise the trajectory of economic growth in the country.

Looking first at the history of growth in Asia since 1980, there are clear, and in some cases extremely significant differences between growth rates. This depends largely on the timing of reforms and also the ability of incumbent regimes to maintain progress in the light of internal and external challenges. Whilst not wanting to write a modern history of Asia, it is quite startling how different outcomes can be achieved from a very similar starting point and very similar geography and demography.