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India or Indonesia: which is a better equity investment?

India or Indonesia: which is a better equity investment?

Indonesia finally has an official winner in the presidential elections, Joko Widodo (Jokowi). This wraps up crucial elections in two large Asian nations – India and Indonesia.

With polls out of the way in both countries, Citywire Asia canvassed a few equity managers for their views on which country they were more confident about in terms of investment potential.

India beating Indonesia

For now, India seems to have a slight edge over its Indian Ocean rival.

‘We see India as being a stronger investment bet as after four years of consolidation, the Indian economy is on the cusp of a structural uptrend,’ said Andrew Swan, head of Asian equities at BlackRock.

He added that despite being one of the best performing markets, Indian equity valuations continue to remain close to long-term average.

In addition, corporate earnings growth is also set for an upgrade cycle, he said.

Swan, who runs the BGF Asian Growth Leaders fund, said he expects earnings growth to average 15-16% per annum for the next three years.

‘This would be an improvement after five years of subdued 7% annualised earnings growth between 2008 and 2013,’ he pointed out.

That upbeat sentiment is shared by Mark Davids, co-manager of JP Morgan’s Asia Pacific Strategic Equity fund, who thinks Indian companies could experience a cyclical recovery in earnings in the near term.

‘Structural reforms and productivity gains in the medium term would improve corporate India’s long term, sustainable earnings,’ said Davids.

‘Meanwhile, longer-term fiscal reforms could lead to a lower cost of capital, including the equity risk premium.

‘While in the near term, there will be a number of potential headwinds – notably the monsoon period and inflation – the long-term outlook appears much more positive than it has at any other point over the last five years,’ he added.

Davids’ fund is currently overweight on both markets, but with a bigger, active bet on India, while for Swan’s fund, India is one of the key overweights.

Don’t dismiss Indonesia

Despite the current edge enjoyed by India, both countries, according to fund managers, have strong local consumption, favourable demographics and rising incomes – all of which are long-term investment themes -- in their favour.

That means fund managers cannot ignore Indonesia. ‘Both countries are compelling from a market size perspective,’ says Christopher Wong, a senior investment manager who works with Hugh Young at Aberdeen Asset Management Asia.

Medha Samant, investment director at Fidelity Worldwide Investment, believes that with election certainty subsiding in Indonesia, pent-up demand and potential investment, FDI and FII, waiting on the sidelines are likely to start feeding back into the economy again.

Fidelity’s Indonesia fund, she added, continues to be well positioned in secular themes related to infrastructure, healthcare and consumption.

BlackRock’s Swan also believes economic activity in Indonesia could pick up in the short term as election uncertainty recedes, although he pointed out that a positive election outcome (a Jokowi win) is ‘already somewhat priced in by markets.’

But he added that ‘if a Jokowi government delivers strong execution, there is a potential that Indonesia’s long-term GDP growth rate could get lifted, boosting investment returns’.

Valuation-wise, Indonesian stocks are currently trading slightly above their historical averages, according to Fidelity’s Samant.

Historically, Indonesia’s equity valuations have ranged between 14-15 times, while current valuations are about 15.5 times, she added.

‘The market has run up strongly in rupiah terms, but in US dollar terms, there is still room for upward movement,’ Samant said.

Overall, the key risk for both countries is whether the new governments deliver on their promises of economic and infrastructural growth and reforms.

For now, Indian equities may be slightly ahead of Indonesian stocks, but that gap could vanish if either country fails to deliver on promised reforms.

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