By LIAM DENNING
If you cut Brazil into 17,000-odd pieces, would it look something like Indonesia?
Brazil has the best-performing stock market of any of the BRIC countries over the past five years, beating China's, Russia's, just, India's. Investors looking for the next Brazil should consider Indonesia. Besides extensive rain-forest, the Asian archipelago bears other striking similarities to the Amazonian giant.
Both economies are commodities powerhouses. Brazil is the world's second-largest exporter of iron ore. Indonesia is the world's No. 1 exporter of thermal coal and palm oil.
Indonesia also sits on the doorstep of raw-materials glutton China. As with Brazil, China is now Indonesia's biggest export market, having almost doubled its share in the past decade to about 12.5%.
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A Chinese slow-down is a risk. Against this, exports as a percentage of gross domestic product for Indonesia are among the lowest for any Asian country. Moreover, the Jakarta Composite index is weighted only 20% to natural resources, compared with more than 40% for Brazil.
Thankfully, both Brazil and Indonesia also have vibrant domestic sectors. Household consumption equated to 65% of Indonesia's gross domestic product last year, similar to Brazil and well above China's level of about 40%. Indonesia's GDP per capita, about $4,400 in purchasing-power parity terms, is only 39% of Brazil's level. But it is 32% higher than India's and projected by the International Monetary Fund to increase by 6.9% a year to 2016. Moreover, Indonesians' appetite for more than just the basics is increasing: From 1999 to 2009, nonfood items' share of spending expanded from 37% to 49%, according to UBS.
Like Brazilians, Indonesian consumers have a lot of catching up to do. In Brazil, for example, mortgages outstanding equate to a mere 3% of GDP, compared with 72% in the U.S. and 18% in China, according to BofA Merrill Lynch Global Research. In Indonesia, the figure is 2%, according to CLSA.
Indonesia also is set to reap a demographic dividend as its working-age population grows 21 million people by 2020, the World Bank estimates. Remarkably, that almost is the same as for China, whose population is more than five times bigger. China's working population peaks this decade, creating a head wind thereafter. Brazil's will peak in 2030; Indonesia's, 10 years after that.
As in Brazil, inflation is a major threat, made worse by poor infrastructure. But that also presents huge potential for development. In Brazil, the primary hurdle to this is high real interest rates.
In Indonesia, it is corruption, with a Transparency International score of just 2.8 out of 10, lower than Brazil's still-woeful 3.7. Indonesia has made great strides since 2003, when its score, at 1.9, was lower than Iraq's. And like Brazil, Indonesia's memories of financial chaos have forced it to get its fiscal house in order. Total public and private debt equates to only 53% of GDP, compared with 153% for Asia as a whole, according to CLSA.
That provides scope for public investment. It should also strengthen the rupiah, boosting Indonesians' spending power, as well as returns for foreign investors.
Despite such potential, Indonesian stocks trade at just 12.5 times 2012 earnings. It might sound like a retro Apple device, but every investor should get themselves an "iBRIC" portfolio.
—Liam DenningWrite to Liam Denning at liam.denning@wsj.com
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