August 10, 2015
[Editor’s note: Sovereign Man’s Chief Investment Strategist Tim Staermose is filling in today while Simon is teaching at his annual youth entrepreneurship workshop.]
In 1970, one United States dollar bought 360 Japanese yen. It also bought 363 Indonesian rupiah. Today, that same dollar buys just 124 yen. But, it buys over 13,500 rupiah.
Let that sink in. While the yen has gained 190% versus the greenback over the past 45 years, the Indonesian rupiah has lost over 97%!
First lesson: clearly, it matters a great deal in what currency you keep your savings.
But the above numbers are backward-looking. A shrewd investor will sell what’s expensive and buy what’s cheap. And the Indonesian rupiah certainly qualifies.
Indonesia is the world’s fourth most populous country. There are over 160 milion people just between the ages of 25 and 34, all with their peak earning and spending years ahead of them.
The economic growth potential from these people working, producing, and rising into the middle class is tremendously exciting.
Developing nations in this stage also typically have a significant apetite for giant infrastructure projects as more and more people graduate up the transportation pyramid from bicycles to motorbikes to small cars.
They need higher quality roads, and more of them. And as many of these new middle class start traveling by airplane for the first time ever, they also need more, bigger airports.
To give you just one example, there are almost no direct flights from Indonesia to Europe and there are none at all to the United States.
This doesn’t make any sense– modern, fuel-efficient jet aircraft can easily cover the distance.
The problem is that the main airport in Jakarta, Indonesia’s capital city, was built in the 1960s, and the runway is not strong enough to handle the weight of a fully loaded Boeing 777.
Consequently, Indonesia’s national airline (Garuda) has to deliberately NOT SELL about 20% of the seats on their flight from Jakarta to Amsterdam in order to decrease the weight.
This sounds like a crazy thing to have to do in 2015.
Because as Garuda is mostly owned by the government, they can fly routes like this that almost guarantee they’ll lose money.
But a normal airline that actually has to be concerned about profits won’t bother with something so economically inefficient.
That’s why most passengers traveling between Indonesia and Europe (or North America) end up having to inefficiently transfer via a third destination elsewhere in Asia.
There are so many more examples, ranging from Indonesia’s notoriously clogged road network to its inefficient port network.
But rather than view these challenges in a negative light, as a long-term investor I prefer to view them as a great opportunity to buy something that’s cheap (but has a lot of potential to grow).
One interesting investment possibility is a exchange-traded fund known as the Aberdeen Indonesia Fund (ticker symbol: IF).
This fund invests in Indonesian businesses typically listed on the stock exchange in Jakarta.
While the fund’s share price is denominated in US dollars, the stocks that it purchases in Jakarta are priced in rupiah. So if the rupiah improves, the fund’s US dollar share price will increase in value.
But there’s an even more interesting aspect to this fund.
As I write this letter, Aberdeen Indonesia Fund’s share price is $6.52. Yet each share has a ‘Net Asset Value’ of $7.36– 12.9% more.
This means that the fund’s assets (i.e. the Indonesian stocks that it owns) are worth 12.9% MORE than what the fund itself is worth.
So you can get an additional discount on Indonesian assets that are already selling for cheap.
And it doesn’t hurt that the fund pays a healthy income distribution each year as well. If this year’s distribution matches last year’s, you’ll be looking at a 8.4% yield.
Taking some exposure to the Indonesian currency and stock market today while the dollar is strong and the rupiah is weak seems a low-risk proposition to me.
Though you do need to have a long-term view. There is no guarantee the rupiah won’t go even lower in the short term. Picking a bottom is impossible.
But I like things that are cheap and hated, and that’s why it is already on my radar.