Chart of the Week: Is Indonesia Overheating?

Indonesia’s 21 percent gain so far this year is tops in the region but is Asia’s hottest market in danger of overheating? Not exactly but there are a few concerns.

Inflation is beginning to become an issue. Food prices are rising at 14 percent a year, energy at 18 percent a year and land prices at 20 percent a year, according to CLSA. CLSA cautions that conventional monetary measures could make matters worse so policy changes—like an anticipated rise in interest rates—must be monitored closely.

This year’s performance has also pushed Indonesia’s valuation ahead of other emerging markets. Stocks in Jakarta trade at roughly 13.5 times earnings over the next 12 months while the MSCI Emerging Markets Index and the MSCI BRIC Index trade at around 11 times, according to a Bloomberg story.

However, it’s important to remember that Indonesia is starting from a very low base. Just two decades ago, only 21 companies were listed and today the country’s stock market remains one of the smallest as a percentage of GDP among major emerging markets.

Investible options are currently limited to energy, telecom and banking sectors and the number of domestic retail investors is less than one percent of the population. As more companies go public and market capitalization grows, increased liquidity should attract more foreign investment.

Domestically, the economy should benefit from its rapidly urbanizing population, rich natural resources, appreciating currency and political stability. All of these should insulate Indonesia’s economy from external headwinds and keep the country on a path of growth for the next five years.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The MSCI BRIC Index is a free float-adjusted market capitalization index that is designed to measure equity performance of Brazil, Russia, China and India.

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