Indonesia is Asia's forgotten giant. The world's fourth-largest nation in terms of population, it has been written off by investors for years as they focused on China and, increasingly, India.
Also the world's largest majority-Muslim nation and archipelago, it has its operational challenges. A string of more than 17,000 islands isn't always the easiest geographic structure for companies to navigate.
The nation's gross domestic product growth slowed to a healthy 4.9% year on year in the fourth quarter, slightly below expectations but robust nevertheless. That left 2016 with a total tally of 5.0% growth, strong by anyone's count, and momentum is building -- the pace is likely to rise to around 5.6% in the year ahead.
The headlines this year admittedly have been more bad than good. The nation cut most ties with J.P. Morgan Chase (JPM) at the start of January after it downgraded its equities rating to "underweight" from "neutral." The enemies became best buds again after the bank raised its rating two weeks later.
A contentious election for the governor of Jakarta is also cause for concern. The incumbent, an ethnic Chinese Christian known as Ahok, is being prosecuted for blasphemy after he cited the Quran on the campaign trail. Full name Basuki Tjahaja Purnama, he had been expected to succeed current president Joko "Jokowi" Widodo after his two-year term ends.
Whether the ire he has raised with Islamic hardliners is enough to undo him remains to be seen. The president also remains a political target, with a complex coalition and a cabinet that he keeps mixing, albeit he's a tougher one to hit.
Latest in the list of worries is a threat from mining giant Freeport-McMoRan (FCX) to sue the Indonesian government over a copper dispute. The company says changes in the country's mining laws present a threat to the company's copper operations at the giant Grasberg deposit on the island of Papua, Indonesia's restless easternmost province. It threatens arbitration if the issues can't be ironed out over the next three months.
But the prospects for Indonesia are excellent over the long term. The rising household wealth and emergence of the middle class are causing the economy to transition from an exports base to being domestically driven.
Indonesia should become the fourth-largest economy by 2050, according to a new report from PricewaterhouseCoopers; it would be behind only China, India and the United States. That status would, of course, match the size of the populations of those nations. Average incomes would lag national growth, although China's household income should be middle of the pack by 2050, the United States still double that sum, and triple India's.
Indonesia's economy, now the world's eighth-largest, then would be valued at $10.5 trillion based on purchasing-power parity. That would be well ahead of nations such as Japan, currently in the No. 4 slot. Vietnam could be the world's fastest-growing economy between now and then, rising to 20th from 32nd now.
Current heavyweights such as the G7 economies would make up only about 20% of the world total according to the PwC forecasts. "We will continue to see the shift in global economic power away from established advanced economies towards emerging economies in Asia and elsewhere," John Hawksworth, PwC's economist and a co-author of the report, said.
How best to play the trends driving that growth? Nomura (NMR) has compiled a list of stocks in Southeast Asia that could double within five years; they include four Indonesia plays.
In the retail industry, mini-market chain Sumber Alfaria Trijaya AMRT:JK is one of the top picks. Its stores rapidly are becoming the dominant replacement for the street-side warungs, or family-owned shops, that traditionally have acted as "convenience stores."
It and competitor Indomaret, a subsidiary of the Salim Group SALIM:JK, each have around a 30% share of the market. That share is growing as family sizes shrink, pricing becomes more competitive and public transportation that would allow longer-distance shopping remains poor.
For telecommunications, XL Axiata EXCL:JK is the top pick across the region, according to the investment bank. In a highly competitive industry, it should benefit from strong demand in data, driving long-term revenue growth.
Near term, the phone company's management is attempting to shift focus and its brand positioning, which has led to a neutral rating from the bank. But Indonesia's data usage is low, and its network footprint is ahead of its rivals as it rolls out 4G capability. That should lead to improved yields and ultimately higher revenue, with operational performance the key to driving any share-price momentum.
Stocks to watch as consumer spending rises in Indonesia include mass-market breadmaker Nippon Indosari ROTI:JK, which should benefit as consumers switch to more convenient food. The company has 80% market share in an industry dominated by mom and pop shops -- mass production accounts for only one-fifth of total sales. Nomura analyst Deidy Wijaya estimates the company should post sales growth of around 17% over the next few years as consumer trends change.
The same shift toward convenience should boost Mayora Indah MYOR:JK, Indonesia's largest producer of coffee, biscuits and confectionary. From its dominant position in Indonesia, it has expanded into the Middle East and Europe and has become the No. 3 player in the coffee industry in the Philippines. Revenue should rise 15% over the next five years, according to Nomura, supported by its proven products and strong market positioning at home and abroad.
The news flow may appear negative. But investors should look beyond politics and the occasional corporate spat -- typically short-lived -- and look to play very positive long-term trends. The giant will not slumber forever.
