To say that Indonesia has outperformed would be an understatement. A thousand dollars invested in the MSCI Asia ex-Japan index ten years ago would be worth about $3,600 now, with dividends reinvested. The same sum invested in the Jakarta Composite would have grown to almost $13,000.
Indonesiaâ€™s core investment case remains compelling. Bigger than Brazil in population, and with a fractionally younger median age, Indonesia resembles India in the composition of its growth: powered not by net exports – just 1 per cent of gross domestic product in the first half – but by consumption and fixed capital formation. As it had no demand shock from which to recover, Indonesia may be one of a handful of regional economies to see gross domestic product growth accelerate next year.
However, a year into the second term of president Susilo Bambang Yudhoyono, some underpinnings are beginning to wobble. Wednesdayâ€™s street demonstrations to mark the anniversary of SBYâ€™s re-inauguration were a sign of dismay at endemic corruption and stalled legal reforms, particularly relating to the acquisition of land. Rising religious tensions and persistent poverty, meanwhile, seem to be threatening the cherished concept of pancasila, the five principles of national social harmony.
Public unrest is as good an excuse as any for investors to trim holdings. Yet even at near-record high valuations – Jakartaâ€™s price/book ratio of 3.5 times is not far from the 3.8 it hit almost three years ago – this remains a tough market to underweight. Oligopolies in the consumer, financial, utility and resources sectors mean that aggregate returns on equity are Asiaâ€™s highest. Foreigners sold a net $148m of Indonesian stocks on Tuesday, the biggest net sale in eight months, as police prepared the razor wire. They will almost certainly be back.