Hey Reader,
The global media narrative on Indonesia and the operators on the ground in Indonesia are not describing the same country.
But it's an interesting setup in Indonesia right now, where the global media narrative is that the country is close to uninvestable / completely imploded. Whereas, if you talk to the operators on the ground, the long-term growth case for Indonesia seems to not have changed much at all.
What has not changed
It's still a GDP per capita growth case that has many decades to run, and a deep penetration expansion case for e.g. modern retail as well as premiumization of retail and consumption patterns.
Those two long-term phenomena take shape on a very different time horizon than the global media news cycle.
Yes, the country has been a bit shaky politics-wise in the short term, and I'm not going to pretend otherwise. But many sectors (for example, consumer-related) seem to be largely unaffected by the latest political turbulence. Especially, on a 3-5 yrs horizon.
What the listed operators are guiding
Many of the industry-leading listed operators, particularly in the consumer-related verticals, are talking about perennial growth rates of 15% per year in their business, and they see that continue to compound for the long term.
That is a very healthy growth rate that most countries would be very envious of, while the global media narrative is that Indonesia has basically imploded.
They can of course be wrong, and operators are usually optimistic about their own business. However, these are the industry-leading listed companies in their categories describing what they expect their own businesses to do.
Why a gap like that can stay open
Most investment funds in the public markets are built on structures that are very liquid. Most of them have daily liquidity, and they are typically in fund structures that cater to retail investors, meaning that there are a number of different restrictions on how liquid or illiquid names they can own.
These fund structures and limitations drive a preference among public equity investors, where they all prefer similar names, due primarily to trading liquidity and momentum.
Because most funds are interested in the same names, most investment banks and brokers cover those same names with equity research coverage, and vice versa.
If you come to these markets with a different fund structure that has more semi-permanent capital, you don't need to adhere to these many restrictions, and instead you can look at different names of the beaten track, where the re-ratings might take a little bit longer to play out but where the under-analysis and under-valuations are much deeper. This gives you ample margin of safety at entry.
How you get the exposure
So let's say you agree with me on Indonesia, or on Southeast Asia more broadly. The next question is how you actually hold that exposure.
The question I get at this point is why not just buy a Southeast Asia ETF. I'd be careful with that.
First of all, there are very few ETFs that actually cover Southeast Asia, and the largest one is not more than 100 million of AUM. Even this supposedly liquid tracker is not that liquid if you ever need to sell your ETF exposure.
Secondly, because it's market-cap weighted, the largest exposures in these ETFs are the top three banks in Singapore and Malaysia. Singapore is an ultra-developed market with a very high GDP per capita, and it might even be the highest in the world. Malaysia is a high-middle-income country with a similar GDP per capita as China.
The long-term growth story of Southeast Asia and its consumer is about getting exposure to rapidly rising incomes per capita. That story primarily plays out in the other countries in the region, being Vietnam, Indonesia, the Philippines, and to some extent Thailand. These countries have a GDP per capita that is roughly a third or half of China's.
If you buy the ETF, you will implicitly buy into an exposure that is 50% to 60% mid to high income country banks. And very little exposure to the long-term GDP per capita growth story of the Southeast Asian consumer.
You basically get an upside-down exposure from what you wanted.
What to do?
Investing in Southeast Asia, and in emerging markets in general, requires not only patience and a long-term perspective, but also a detailed and well-researched understanding of how you are getting the exposure to the listed markets of the region. There are many structural ways of going wrong.
So look through whatever Southeast Asia exposure you already hold today, and check the country weights and the sector weights rather than the fund name. If the largest positions are the Singaporean and Malaysian banks, then you don't own the Southeast Asian consumer story, whatever you believe about it.
And on the Indonesia question specifically, separate the short-term politics from the income per capita story, and ask yourself which of the two your own investment horizon actually is and can be exposed to.
Short-term horizon = exposed to short term political swings / long-term horizon = exposed to the steady long-term rising in per capita incomes and consumption of 700 million people.
I'm spending my time on the countries where the GDP per capita story still has many decades to run (primarily Indonesia, Vietnam, Philippines and Thailand => home to over half a billion people), and I'm holding it in a structure which allows us to stay steady owners for 5 years or longer.
Christopher B. Beselin
Investing, compounding & exiting
Christopher B. Beselin is the Chief Investment Officer of Endurance Capital. The views & opinions expressed in this newsletter are for informational and educational purposes only and should not be considered investment advice.
PS. If you're looking at Indonesia or Southeast Asia right now and you've reached a different conclusion than I have, reply to this email and tell me where you think I'm wrong.
