Digital Features

Talking heads: Committing long-term capital to emerging markets

Jerry_GohJERRY GOH, INVESTMENT MANAGER – ASIAN EQUITIES, ABERDEEN STANDARD INVESTMENTS
The International Monetary Fund’s (IMF) most recent assessment of Indonesia’s economy concluded that the country not only “has the firepower to boost its economic recovery”, but also that appropriate reforms and policy measures can generate “greener and more inclusive recovery”. How are you seeing this translated into investment opportunities – and which themes and sectors are you constructive on?
We remain positive about Indonesia due to the following reasons. Firstly, businesses and consumers have increasingly turned to online solutions as a result of the pandemic, with the government also encouraging this offline to online shift. The move towards a digital economy helped prevent a complete stall in economic activity and should aid in recovery. Secondly, Indonesia’s balance of payments is starting to look healthy, with a trade surplus recorded in the first quarter of 2021. The surplus has been driven by the surge in commodity-related exports, offsetting imports of oil, capital goods, steel and machinery. We expect Indonesia’s current account balance to remain benign. Finally, foreign direct investments (FDIs) seem to have bottomed, growing 12.5% year on year in the first quarter to US$7.7 billion (€6.3 billion), compared to 9.9% growth in the prior quarter. The biggest flows are going into the manufacturing and processing sectors, namely, food and automotive. As a result, we see opportunity in the real estate, financials, and materials sector.
  • Real estate has benefited from the government’s tax-exemption programme, which should help unlock pent-up housing demand. Pre-sales, particularly in non-investment-related segments, have grown considerably, resulting in a sector re-rating. Valuations, however, remain cheap at around 0.3-0.5 times price to net asset value.
  • Financials would be a good proxy for economic recovery, with both large transaction banks and microfinancing lenders benefiting as the vaccination plan gets underway, alongside the recovering export market.
  • The outlook for materials, especially cement, should improve on the back of increased infrastructural spending by the government and the private sector, after a delay in spending in 2020. Nickel should also benefit from the rising global demand for electric vehicles (EVs), given that it is an important component in EV battery manufacturing.
What are the top three risks that investors should be watching and factoring into their strategies when it comes to Indonesia?
The top risk remains the extent to which the government can control the Covid-19 outbreak. Investors should scrutinise execution and introduction of levers to accelerate the vaccination rollout. Outbreaks can stifle economic activity and delay FDI flows into the country, therefore delaying recovery. Regulations within Indonesia are changing in an effort to attract more FDIs. The extent to which the government is able to execute on its omnibus law and jobs bill would be key areas to watch. Success will result in more flows into the country, therefore generating better economic outcomes. Finally, digitalisation is happening rapidly. On one hand, such digital acceleration helps the government achieve its goal of improving financial and economic inclusion, while on the other, robust regulations and rules are required to ensure fair play and oversight. The extent to which the government is able to work with the industry players to develop a sound ecosystem for financial technology and internet commerce to flourish would be another key area to watch. Indonesia is the world’s fourth most populous country and is expected to see a double-digit growth rate in its e-commerce market in the coming years. How sizeable an investment opportunity is this?
Indonesia is the biggest market in southeast Asia by various measures, be it population, internet gross merchandise value (GMV) contribution, or gross domestic product (GDP). According to the Google-Temasek’s e-Conomy 2019 report, Indonesia’s internet economy GMV was around $44 billion in 2020. The number is expected to grow at a compound annual growth rate (CAGR) of 23% over the next five years to $124 billion by 2025, forming around 67% of southeast Asia’s total internet economy GMV. Indonesia’s internet penetration rate is also only at 32.3%, which is low compared to its developed nation counterparts. The significance is that is there huge room for growth, particularly for the digital or new economy commerce. The largest southeast Asian economy also has the demographic advantage of a young population that will drive the start-up and digitalisation culture. All in all, Indonesia’s long-term potential, especially in e-commerce, is undeniable.
OSCAR GARCÍA-SERRANO JIMÉNEZ, CHIEF FINANCIAL OFFICER, MAPFRE BRAZIL How are current events affecting the outlook for LatAm countries, and which areas are you finding the most challenging?
In our view, we believe that the main issue for 2021 in the Latin America region will be the recovery of economic activity due to a high probability of a third wave of Covid, considering that the primary countries don’t have enough vaccines to execute a quick strategy of immunisation. Another challenge is inflation due to a recent rally of commodities combined with local currency depreciation. This effect could bring anti-cyclical actions in monetary and fiscal policies and, in some cases, increased political risks (populism, radicalism or a desire for disruption in the political status quo). These effects can be already observed in some countries. How are investors dealing with ESG issues such as deforestation in Latin America, and what kind of transparency issues do they face?
In order to observe issues sensitive to ESG themes in Latin America, analysts must maintain a deeper and more structured process of verifying these themes related to the issuer's name, both through public surveys and through specific tools designed for this purpose. In the specific case of wood use, good emitters already have controls to verify and certify the origin of the wood, and normally illegally extracted wood is unlikely to be used by first-rate emitters who observe the concepts of ESG. What are the main opportunities in LatAm economies at present, and what are the fundamentals behind them?
Companies involved in the extraction of agricultural and metallic commodities are going through a period of margin recovery and an increase in external demand, and may outperform the sectors most dedicated to the LatAm markets that are still suffering the effects of the pandemic in the regional economies. © 2021 funds global mena

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