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EMERGING MARKETS Find out about the top performing Indonesian market
Find out about the top performing Indonesian market
Stocks in the fourth most populous nation on earth are outshining those in other emerging economies
China is so dominant that the diversity and strength of other emerging Asian economies is often forgotten – Indonesia being a case in point.
The Indonesian market has been one of the better emerging market performers in 2022 and on a five-year view the MSCI Indonesia index has outperformed the wider MSCI Emerging Markets index, eking out annualised gains of 2.2% compared with -2.7% for the broader benchmark as at the end of October.
In the first 10 months of 2022 it was up a creditable 8.4% compared with a near 30% fall for MSCI Emerging Markets. The financial sector has a dominant position, with a weighting of more than 55%, with communication services a distant second at less than 13%.
The fourth most populous nation on earth, Indonesian stocks also have a material weighting in the MSCI Emerging Markets Asia ex-China index of 5.3%.
In November 2022 the country hosted a high-profile G20 summit and it has rapidly reduced the proportion of people living below the poverty line from close to 20% in the early 1990s to below 10% today. The country is a big exporter of strategically important commodities.
Reflecting on its recovery from the pandemic, a recent report from the World Bank noted that: ‘Sound macroeconomic fundamentals, sticky commodity export prices, and structural reforms will support aggregate demand.
‘GDP is projected to grow by 5.1% in 2022-23 and 5% in 2024. Contact-intensive sectors like services and tourism as well as manufacturing will also push the recovery and support job creation.’
MSCI Indonesia – sector breakdown
Financials (55%) Communication services (13%) Consumer staples (9%) Materials (8%) Consumer discretionary (7%) Energy (6%) Healthcare (2%)
Chart: Shares magazine • Source: MSCI, data as at 31 October 2022
This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit here
Emerging markets: Views from the experts
Three things the Franklin Templeton Emerging Markets Equity team are thinking about today
1.Latin America: Markets in Latin America have been the best performer in emerging markets (EMs) year-to-date, driven by the rise in the energy sector, which has posted double-digit returns. Looking ahead, Luiz Inácio Lula da Silva’s successful run for a third term as president of Brazil, in combination with his party’s lack of control of either House of Congress, imply that there are checks and balances in place to act as fiscal constraint. Additionally, recent reforms imply the risk of a repeat of past interference in the management of government-controlled companies has diminished. We remain positive on the outlook for equity markets in Brazil and Latin America.
2. Earnings: EMs have witnessed a sharp reduction in 2022 consensus earnings forecasts, which have declined from 6% growth in January 2022 to -11% at the end of October. China has been the primary drag on earnings over this period, but resilient earnings growth in Brazil, Mexico and Indonesia has been a partial offset. Focusing on 2023, EM earnings growth is forecast to witness a modest rebound to 3%, based on consensus forecasts; however, a large portion of this is reliant on the recovery in Chinese earnings, which is far from assured.
3. Interest rates: The size of interest rate increases globally is starting to slow, with the Bank of Canada opting for a 50 basis point increase in October over its previous strategy of 75 basis point increases at prior meetings. Other central banks may follow this move in the coming months amidst signs that earlier rate increases are starting to filter through to the economy and as the pace of energy price increases starts to slow. This should have positive implications for future inflation and signals we are closer to the end than the start of the rate tightening cycle. While rates are expected to nonetheless continue rising, markets are a discounting mechanism and may start to focus on the timing of the peak in the rate tightening cycle given the increasing risks of a recession in 2023.
TEMPLETON EMERGING MARKETS INVESTMENT TRUST (TEMIT) Porfolio Managers
Chetan Sehgal Singapore
Andrew Ness
Edinburgh TEMIT is the UK’s largest and oldest emerging markets investment trust seeking long-term capital appreciation.
Investing better with Vietnam Holding
Sean Hurst, Chair of VNH’s ESG Committee
Over the last year, Vietnam Holding (VNH) has established itself as a leader in responsible investing activities in the Southeast Asian country. VNH received five-star scores for its 2021 PRI reporting, which is the largest global reporting project on responsible investment. The carbon footprint of VNH’s 2021 portfolio, meanwhile, is 67.5% lower than the Vietnam All Share Index (VNAS) benchmark, while also outperforming the VNAS index on a year-on-year basis. This can be attributed to sector allocation - with a focus on less carbon-intensive non-manufacturing sectors - as well as stock selection, featuring best-in-class companies actively pursuing emissions reduction initiatives.
Over the last 12 months, Dynam Capital, VNH’s investment manager, has also been active in company engagement through both private meetings and collaborative engagement. In March, for example, Dynam hosted a webinar for 50 companies operating in Vietnam to talk about how to increase the accuracy of carbon footprint reporting. This was organized together with Vietnam Energy and Environment Consultancy JSC.
ESG, short for Environmental, Sustainable, and Governance, is an increasingly common phrase in the corporate and investment sectors, but it is not without its critics. Hurst acknowledged these issues, while also affirming that VNH is extremely careful in approaching the topic. “There is a growing concern among some investors about the practice of ‘greenwashing,’ a fear that ESG has somehow gone too far,” he said. “For VNH, we look at each sector separately, and the ‘E’ is increasingly important, and we were one of the first funds in Vietnam to estimate the carbon footprint of our portfolio.”
Carbon footprint reporting is still new in Vietnam, with less than ten listed companies disclosing emissions data in their annual reports. VNH, for its part, uses an external professional firm to help estimate the annual footprint of each portfolio company. “But we have seen greater interest in and willingness to do so from companies in the next few years,” said Craig Martin, Chairman of Dynam Capital. “Especially since Prime Minister Pham Minh Chinh announced at COP26 that Vietnam will make efforts to achieve its net-zero targets in 2050.” This serves as crucial context for VNH’s responsible investing efforts, as the fund announced its own net-zero goals just before COP26, aligning with the Vietnam’s government’s agenda.
Officials have taken several steps down this path in the months since the climate summit. In January, a new decree outlined regulations on the reduction of greenhouse gas emissions and protection of the ozone layer. Then, in June, a circular development scheme was approved. It aims to, among other goals, reduce the intensity of greenhouse gas emissions per GDP by at least 15% by 2030. Perhaps most noteworthy is the Power Development Plan 8 (PDP8), which will guide Vietnam’s energy policy until 2030 with a vision to 2045. While the plan has not been finalized and is overdue, drafts have outlined a continuation of the country’s strong renewable energy development in recent years, especially in terms of solar and wind. The most recent PDP8 draft envisions a power mix of 50.7% wind and solar by 2045, with possibly just 9.6% of power coming from coal. Offshore wind, which remains largely untapped, is expected to be a major generator of electricity in the future.
To be sure, these are hugely ambitious goals that will require massive financial investments, but the guidelines are promising, and both investors and private companies have important roles to play.“ After COP26, the government’s efforts in changing its energy strategies and relevant policies have shown the country is willing to address climate change,” Martin said. “We think institutional investors in the Vietnamese market have a role in encouraging change, alongside the government and business. Some investors are also specifically looking to invest in companies that provide low-carbon solutions and technology to help the country speed up its decarbonization journey.”
VISIT WWW.VIETNAMHOLDING.COM FOR MORE INFORMATION
