"THE JURY IS STILL OUT"
(Fundsupermart.com) - Launched at the end of 1997, the Aberdeen Indonesia Equity Fund has suffered from the political instability that has plagued the Indonesia, post-Asian financial crisis. Since inception, the fund has returned -35.3%, (see table below) and much of this loss was blamed on the heavy depreciation of the rupiah which fell by some 22 percent in value against the Singapore dollar last year.
However the fund's fortunes could very well change this year notes Hugh Young, Managing Director of Aberdeen Asset Management Asia. With the appointment of Megawati Sukarnoputri as the new President of Indonesia, he reckons that the Indonesian stock market stands a good chance of being a star performer in the region. Preliminary indications so far appear positive. The Indonesian currency the rupiah appreciated in value as news of her appointment in late July, and has since been among the strong performers in the region. This, according to Young, puts the often overlooked Indonesian equity market, on a good footing. "The stock market has already been a good performer with the currency move and the positive thing about Indonesia is that it is a vast totally neglected economy and neglected stock market from an international perspective. Any refocus of international interest could see the market rise very, very sharply. Because many people have absolutely nothing in Indonesia, the upside is substantial. The key issue is whether or not Megawati will be a lame duck president who favours friends."
Performance Of The Aberdeen Indonesia Equity Fund (as at 29 June 2001)
Benchmark: Jakarta SE Index; Source: Aberdeen Asset Management S'pore
Bid to Bid in Singapore Dollars
COMMITMENT TO REFORM CRUCIAL
For the time being, new president and daughter of former President Sukarno, appears to be making the right moves. Market watchers have praised her choice of "market friendly technocrats" as Cabinet colleagues, and her pledge to get tough on corruption. However Young says it's too early to tell whether the positive sentiment will last.
Megawati may have made a good start but it will take more evidence that Indonesia is moving away from the destructive practice of corruption before managers like himself will increase their investments in the country. "Everything that has happened in the short term is being welcomed, but what happens in the long term will be the harder part. We will wait and see what kind of economic policies are announced and more importantly how they are implemented. Megawati has made a good start on that. But whether she is able to resist endemic corruption is going to be her big test. There may be a lot of goodwill but the jury is still out."
Fighting corruption will not be an easy task for the new Indonesian President. Deeply entrenched, corruption has been a key weakness in Indonesia. It has been blamed for slowing down economic reforms mandated by the International Monetary Fund after the Asian crisis, in return for financial aid to help rebuild Indonesia's tattered economy. For example, the Indonesian Banking Restructuring Agency (IBRA) was established to recapitalise failed banks and sell off state assets in order to pay off the huge external debt after the rupiah plunged in value (the Indonesian currency fell from Rp 2,500 per US$1 at the onset of the crisis to Rp 17,000 in January 1998 and its external debt ballooned to a whopping US$140 billion).
However IBRA's effectiveness has been called into question amid allegations that IBRA officials were bribed into stalling the corporate sell-offs. How IBRA performs under the new administration will be important as it is a key benchmark for assessing the strength of reform, notes Young. "It's been painfully slow process because everyone of the major bankrupt conglomerates have had their spokesman at IBRA slowing up the process. IBRA is a vital part of the economic change in Indonesia and the most important part of that is for IBRA to operate transparently and without corruption."
NO CHANGE IN INVESTMENT STRATEGY
Young points out that as the political situation in Indonesia is still quite fluid, the fund will stick to its current investment strategy. It will continue to invest in established companies like Unilever (a consumer goods manufacturer) that he feels are attractively valued and have strong balance sheets."Even before the crisis we were invested in Unilever and other consumer companies that have very strong balance sheets. Our portfolio is basically unchanged from where it was a year ago. Even three years ago, still the same companies because we had always been cautious about the politically connected companies and those with huge debts on their balance sheets."
The fund has around 67% of its holdings in consumer and retail companies like Unilever (see below). Young explains that this is not out of design but an acknowledgement that consumer and retail is the strongest performing area in a market that doesn't offer a wide range of investment choices. "There's not much in the way of technology so that's not a concern. As for the banking sector, what's left remains to be seen as so much recapitalisation is necessary. The resource companies should be attractive as it is all priced in US dollars, but in practice a lot of the resource companies are tied in with political affiliates. So we have a small exposure to resources through quality companies like Gulf Indonesia which is a subsidiary of Gulf Canada."
Young admits however there are drawbacks to investing so heavily in the consumer and retail sector, such as the negative impact of the stronger rupiah on manufacturers. He says this could be a problem down the road though he isn't worried about it yet. "Appreciation of the currency could be a problem. Depending on the cost of goods as they do import a lot. That would drive costs up. A secondary consideration is that the rural areas that have tended to be very good for the consumer companies and they might well see their relative earnings decline because of a drop in demand from this area."
Young adds that he would rather stick to these limited choices than venture into distressed companies that offer potentially higher returns. Very often, these distressed companies have very high levels of debt and in order to raise cash, issue bonds that pay high interest. The risk premium for these he points out are simply too high for the fund but suggests that investors with a higher risk appetite consider them. "You are better off buying the debt of some of the companies than the equity. We can't as we are an equity fund. There are opportunities in equities for some of the bombed out companies that have to go through IBRA. However there has to be a lot of resolution on that front before we even look at those companies. On paper many of them are bankrupt and require a trade sale, so it isn't as attractive for us as plain vanilla equities, which on a risk reward basis are more favourable and have a price-to-earnings valuation of 8-9 times."
Consumer Retail - 67.2%
Telecoms - 12.9%
Energy (Oil and Gas) - 8.9%
Manufacturing - 5.4%
Banking and Finance - 4.7%
Cash - 0.9%
Top 5 Holdings
Sari Husada - 10.7%
Gulf Indonesia Resources - 8.9%
Unilever Indonesia - 8.7%
Sepatu Bata - 8.7%
Gudang Garam - 8.3%