One of the world’s best-performing stock markets is about to get a big boost …
I’m talking about Indonesia, which returned a compound annual rate of 23.2 percent from 1999 to 2018.
That’s three times better than the S&P 500, which returned 7.2 percent per year (including dividends) over the same period.
Last week, Indonesia – the world’s fourth-most populous nation and 16th-largest economy – held presidential elections.
Incumbent Joko Widodo (more popularly known as “Jokowi”) won.
And his victory could lead to more big gains in Indonesian stocks. Here are just four reasons why…
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1. Election spending is big in Indonesia
Elections in developing Asian nations typically result in large campaign- and election-related spending that is disproportionately large compared with developed countries.
For example, in India, election spending this year is estimated at US$14 billion, making it the most expensive in the world. That’s equivalent to 0.54 percent of its GDP.
Indonesia is estimated to have spent US$1.8 billion on this year’s elections, a 55 percent increase from the 2014 elections. That’s about 0.18 percent of total GDP.
By contrast, the US$6.5 billion spent during the U.S. elections in 2016 was equivalent to just 0.03 percent of GDP.
Large election-related spending leads to a boost in consumer spending, which results in stronger corporate profits and higher stock prices.
For example, in the 2014 election year, retail sales in Indonesia jumped 14.9 percent, according to the central bank. That was higher than the previous year’s 12.8 percent increase.
That same year, the Indonesian stock market soared 20.2 percent.
This year, in January and February alone, retail sales in Indonesia grew 7.2 percent and 9.1 percent year-on-year. That’s significantly faster than the 3.7 percent increase in all of 2018.
2 Tax cuts are on the way
Jokowi campaigned with a promise to cut corporate tax rates from 25 percent to 17 percent.
A cut of that magnitude could free up US$3 billion to US$6 billion in corporate profits to be reinvested.
But more importantly, it means a significant jump in reported corporate profits from listed companies. That’s always good for the stock market.
The most recent example of this is from the U.S. stock market, which gained 5.6 percent one month after President Donald Trump signed the Tax Cuts and Jobs Act of 2017. That lowered U.S. corporate taxes from 35 percent to 21 percent.
The stage is set for a major socialist takeover on U.S. soil.
Over a dozen socialist lawmakers are “marked out” to implement socialist policies that will become a part of America’s fabric.
And it’s all backed by a vicious cartel of powerful men and women who have major influence regardless of who’s in the White House.
It doesn’t matter which state you live in – even the most conservative states will be affected by the nation-wide socialist change that’s coming.
3. Indonesian stocks historically perform well after elections
As I said earlier, Indonesia has been one of the best-performing markets over the past 20 years, up an average of 23.2 percent per year from 1999 to 2018.
And Indonesian stocks have historically performed well after elections.
During the past four election cycles, Indonesia’s stock market has gained 12.4 percent on average in the three months after the election. After six months, stocks were up 31.4 percent on average… and after 12 months, they were up 37.8 percent on average.
Of course, this is no guarantee that the election will push stocks higher this time around, but history is promising.
4. A powerful long-term growth story
As I’ve just shown, Indonesia’s elections will help boost the country’s market in coming months. But in the bigger picture, Indonesia is also a great place to invest.
Economically, it’s one of the most stable markets in the world.
Since 2001, Indonesia’s economy has grown between 4 to 6 percent – though global financial crisis, political uncertainty and currency fluctuations. Even during the global economic crisis, the country posted GDP growth of 4.7 percent in 2009.
Indonesia also has favourable demographics characterised by a large, young labour force.
Forty-two percent of its population is 24 years or younger. That’s bigger than the entire population of Japan, and it supports growth in its local industries.
Indonesia is also a major producer and exporter of natural resources and agriculture. It exports crude oil, natural gas and coal to China, the U.S. and Singapore. It’s also the world’s largest palm oil producer, the second-largest rubber producer and a top 10 natural gas producer.
So Indonesia generates a substantial amount of revenues from exports of natural resources, giving it a good balance of trade (the difference between imports and exports) with other nations.
And because Indonesia has historically exported more than it’s imported, the country has a high level of foreign currency reserves (US$120 billion) – enough to pay for nearly an entire year worth of imports.
All this makes Indonesia more resistant to external shocks – like another global financial crisis.
In short, with an election boom, tax cuts, growing GDP, favourable demographics and its exports, Indonesia’s stock market (already up 5.3 percent since January) is likely headed higher this year.
One way to get exposure to Indonesia is through the iShares MSCI Indonesia ETF (Exchange: New York; ticker: EIDO). Its top holdings include the country’s largest listed banks, telecom service providers and automotive companies.
Editor, Stansberry Pacific Research