FE Trustnet News and Research

Indonesia: the price of volatility
Jonathan Boyd
By Jonathan Boyd  12 Nov 2009

Indonesia has proved an unlikely investment opportunity in the last ten years, or is the real winner volatility?
Hindsight is a wonderful benefit. Sometimes it is also painful: £1,000 invested in the MSCI Indonesia index on 9 November 1999, followed up by regular £50 monthly top ups would have turned into £28,768 by now, according to Financial Express data.

Investing the same into the FTSE All Share index would have brought £8,813


Source: Financial Express Analytics

Performance of MSCI Indonesia over 10-yrs


Source: Financial Express Analytics

In index terms Indonesia returned 259.68 per cent over the period. MSCI China, by way of a benchmark of a much larger Asian economy, served up a lowly 119.31 per cent, although in the relatively stakes this is still far better than the FTSE All Share return of 23.57 per cent over the decade.

Performance of MSCI Indonesia over 1-yr

Source: Financial Express Analytics

In the past 12 months the Indonesian index returned 107.24 per cent. Compare that with MSCI Thailand returning 53.33 per cent, MSCI Singapore 49.95 per cent, and MSCI Malaysia 46.66 per cent.

But, before betting the farm on this market rather than its neighbours or the typical portfolio core of UK equities and fixed income, it is worthwhile taking a look at what level of volatility investors were required to put up with in order to achieve such returns. Over the past three years this has clearly been the case.

Financial Express data suggests annual volatility for the MSCI Indonesia index was 42.68 per cent, set against an annual return of 22.95 per cent.

Compare that with the far lower volatility of 20.46 per cent for MSCI Malaysia against annual return of 19.85 – ie, not far off its neighbour. However, over the past decade Indonesia has still done better on this basis. Annual return averaged 14.22 per cent with volatility of 38.53 per cent, against return of 2.3 per cent and volatility of 28.27 per cent for Malaysia.

Thus, one could argue that the long term investor in the country has not necessarily had to take on much more risk in order to get superior returns against other markets nearby.

Unfortunately, it is not all that easy to buy into the country via country specific funds – beyond exposure gained through broader regionally focused ones.

Filtering out those with less than a 50 per cent weighting to the country leaves just seven to consider. One of these is Aberdeen’s US listed closed ended Indonesia fund, which came to it by way of the purchase of Credit Suisse assets earlier this year.

 Fund name
 % per cent
Fortis L Equity Indonesia TR in GB
Allianz RCM Indonesia TR in GB
Fidelity Indonesia TR in GB
Ciptadana Indonesian Growth TR in GB
FPIL Ciptadana Indonesian Growth TR in GB
Aberdeen Indonesia Equity TR in GB

Source: Financial Express Analytics, performance 10/11/2008-09/11/2009 rebased in sterling

What is noteable is investors will have to look to the offshore funds universe. Ignoring the country on that basis would, though, be missing a number of points. Indonesia is one of the world’s most populous countries; it is next door to one of the strongest growing OECD members – Australia, which raised interest rates for the second time in two months last week – and serves as a resources provider for big importers such as China. The country’s GDP is projected by the IMF to grow 4 per cent in real terms through 2009, and 4.8 per cent in 2010.

Dhananjay Phadnis, manager of the Fidelity Indonesia fund, outlined two key changes in a recent note. The currency has appreciated, helped in part by rating agency Moody's upgrade to the country's sovereign debt by one notch to Ba2. The other was the re-elected government taking office in October, with promises of employment generation and infrastructure development leading Phadnis to increase real estate exposure.

"The Indonesian stock market does not look cheap in the Asian context, however, the lowering of input prices due to a strong rupiah and a recovery in demand will likely provide scope for earnings to surprise on the upside when companies report their third quarter performance," Phadnis wrote.