Should Equity Investment Bargain-Hunters Come to Indonesia?

Yes, but with reservations.

The Indonesian economy presents a notable opportunity for public and equity investments when compared by the numbers to other global markets such as the United States, the European Union, and Japan. A detailed analysis of the data illustrates Indonesia's potential in the context of PE fundraising, general investement, economic size, and growth trends.

Indonesia is the 4th largest country by population and the 3rd largest democracy in the world. Every country has specific problems to overcome, but Indonesia may be uniquely worthwhile.

PE Funds Raised

In recent years, Indonesia raised $4.55 billion in private equity funds. While this number is small compared to the United States ($654 billion), the European Union ($123.69 billion), and Japan ($9.4 billion), it highlights the early-stage nature of Indonesia’s PE market. The relatively low level of capital raised in Indonesia suggests a market that has significant room for growth.

Size of Economy

Indonesia's economy is valued at $1.47 trillion in terms of gross domestic product (GDP). In comparison, the United States’ economy is valued at $28 trillion, the EU at $17 trillion, and Japan at $4.4 trillion. While Indonesia's economy is smaller in absolute terms, its size relative to the amount of PE capital raised points to under-penetration of equity in the country.

Ratio of PE to GDP

The ratio of PE funds raised to GDP in Indonesia is 0.003. This is lower than the 0.023 ratio in the United States, the 0.007 ratio in the European Union, and the 0.002 ratio in Japan. The lower ratio in Indonesia suggests that equity activity, relative to the size of the economy, remains limited compared to these other markets. This lower level of saturation indicates a potential for future growth as the equity market matures in Indonesia.

Population Growth

In an era when population decline has become a crisis issue in countries like Italy and Japan, Indonesia produces greater numbers of future generations.

General Economic Growth

Indonesia’s 5% Annual GDP Growth exceeds that of the USA or EU.

Internet Penetration

Indonesia’s Internet Adoption exceeds that of China or India.

Public Equity Gives an Indication of Equity Price Discounts to USA and Worldwide

Of course, with private companies, we will not really know their income and cash flows, except we assume both ratios are positive since they continue in business. In the case of public equities in Indonesia, metrics show that, in general, there are bargains to be had:

In general, there is relatively less money in the stock market than in the general economy compared to the USA or in general internationally.

These are the numbers as percentages, and by this standard, Indonesian equities garner one-quarter of the interest that US equities do (although some US equities are large multinationals extending outside of the US economy).

Not surprisingly, then, Indonesian public company profits are selling at a 50% discount to the USA. Is such a discount fully warranted?

Conclusion

Indonesia appears to offer great opportunities for equity investors. However, understanding its unique challenges—such as regulatory hurdles and investor risks—is key to success. My excitement is more of a hypothesis at this stage. Much discussion and experience are still needed to prove how truly capital-friendly it is.