How fast the Chinese economy is growing is a constant obsession of global markets.
But no country – especially one the size of China – can continue expanding at a rate that doubles every seven years. The law of big numbers means growth will eventually slow, and it has.
Since 2010, China’s economy has been slowing. Last year, its GDP grew “just” 6.6 percent – the slowest rate in 28 years.
The U.S.-China trade war is also pulling down China’s economy. And it’s been a headwind for stock markets.
But while China is slowing down, there’s another country that’s been quietly growing at twice the global average, doubling in size every 12 years. And its stock market has risen three times faster than the S&P 500.
I’m talking about Indonesia.
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What Indonesia does differently
Indonesia is Southeast Asia’s most populated nation, with 264 million people as of 2017.
It’s also the world’s 16th-largest economy, with a GDP of US$1 trillion in 2017 – similar in size to the economies of Mexico and Turkey.
Since 2001, Indonesia’s economy has grown between 4 to 6 percent – through the 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.
That kind of performance – see the graph above – is unusual.
Indonesia was able to achieve this because it’s less dependent on the global economy than others. Its exports account for only 17 percent of GDP. That compares with 71 percent for Malaysia and 173 percent for Singapore.
It has an enormous domestic market that supports the economy. The country’s small and medium-sized businesses account for about 60 percent of Indonesia’s gross domestic product and create employment for nearly 108 million Indonesians.
Moreover, Indonesia has favourable demographics characterised by a large, young labour force (42 percent of its population is 24 years old or younger) that supports growth in its local industries.
It helps that Indonesia is a major producer and exporter of natural resources and agriculture. It sells things like crude oil, natural gas and coal to China, the U.S. and Singapore.
Some of the world’s largest mines can be found in Indonesia, including Freeport-McMoRan’s Grasberg mine – the largest gold mine and second-largest copper mine in the world.
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 imported, the country has a high level of foreign currency reserves (US$120 billion) – enough to pay for nearly an entire year’s worth of imports.
All this makes Indonesia more resistant to external shocks – like a global financial crisis.
This is showing in its stock market.
Indonesia’s stock market has performed exceedingly well over the last 20 years, gaining an average of 23.2 percent per year.
That compares with 7.2 percent average annual gains in the S&P 500, 15.9 percent annual gains in China and 6.8 percent for the MSCI World Index.
Over the last 10 years, Indonesia outperformed the other markets with a 21.2 percent average annual gain.
And while the Indonesian market fell 6.7 percent in 2018, it still fared better than many other markets. The Hong Kong market fell 10.8 percent, and China declined a 26.9 percent.
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Will Indonesia continue to do well?
Indonesia has a lot going in its favour.
For instance, the country’s household debt-to-GDP ratio is just 17 percent – one of the lowest in Southeast Asia.
That’s compared with 50 percent in China, 59 percent in Singapore, 76 percent in Hong Kong and 77 percent in the U.S. That means that Indonesians, in general, have little debt.
So the potential for Indonesia’s consumers to increase their spending is significantly higher than the other nations.
Indonesia’s consumer spending has been growing at a compound annual rate of 4.7 percent over the last eight years.
That’s nearly double the growth rate of consumer spending in the U.S. and Hong Kong. It’s also growing faster than other economies of similar size, like Mexico (2.7 percent) and Turkey (4.5 percent).
In short, Indonesian households are not overburdened with debt and their spending is sustaining growth in the economy and the stock market.
The U.S. trade war with China is also favouring Indonesia. The country offers low cost and abundant labour, easy access to raw materials and competitive electricity rates (cheaper than Thailand, Singapore or the Philippines).
Companies producing textiles, footwear and even electronics looking to move out of China will likely have Indonesia in their sights. Major iPhone assembler Pegatron (Exchange: Taiwan; ticker: 4938), for instance, announced in December that it was relocating from China to Batam Island in Indonesia.
In short, Indonesia is one market to keep your eye on.
One way to gain exposure to Indonesia is through the iShares MSCI Indonesia ETF (Exchange: New York; ticker: EIDO). It’s managed by BlackRock and its top holdings include the country’s largest listed banks, telecom service providers and automotive companies.
Editor, Stansberry Pacific Research