The GDP of the three was projected to reach $6.4 trillion in 2009, or 44% of the US GDP. Together, their  combined population is 2.7 billion, or 40% of the world population. And while China and India are rapidly growing, commodities-rich Indonesia is emerging as a supplier of resources, such as thermal coal, rubber, palm oil and (potentially) gas, to the two nascent economic powers. Even with modest growth, Chindonesia is projected to create $10 trillion by 2015, according to the CLSA report Enter the Komodo.

“Indonesia means commodities,” says Nick Cashmore, director of CLSA Indonesia. “If you believe in the future growth of India and, in particular, China, then you go commodities, in which case you play Indonesia. It is really a leveraged bet on Chinese growth.” Cashmore notes that the domestic angle is a supplementary lure. Adding the largest market in Southeast Asia with a population of 230 million into the equation means there will be significant growth potential, even when the Chinese and Indian economies eventually mature.

For Kunal Ghosh, senior vice president and portfolio manager at Allianz Global Investors Capital, the emergence of Chindonesia has analogies with BRIC, a term first coined in 2001 by Jim O’Neill from Goldman Sachs to refer to Brazil, Russia, India and China. Ghosh believes the emergence of Chindonesia funds hinges on what Indonesia brings to the table compared with Chindia. He argues that investors have overlooked Indonesia since the 1997 Asian Crisis, when the aspiring Asian Tiger lost 13.5% of GDP for the year and the rupiah spiraled out of control, sending the country into economic collapse.  

“Indonesia learned from those mistakes,” he says. “It has an improving and stable political environment, pro-cyclical economic policies, favorable tax rates, minimal foreign debt and a disciplined fiscal environment. All of this has helped it emerge from this current crisis unscathed.” 

Along with China and India, Indonesia is one of the few countries to forecast GDP growth for 2010/11 (5.9% according to CLSA). Yet, for Ghosh, what makes Indonesia compelling is that in Allianz Global Investors Capital’s comparisons of cumulative returns between Chindonesia and Chindia, Chindonesia has delivered historically superior returns over 10 years. In addition, Indonesia has relatively low correlations to the other two countries. “Effectively, Indonesia adds diversification through its role as an exporter of commodities. If you believe people are going to consume more in these three countries, if they will need more energy, then Chindonesia offers you higher returns with a similar level of risk,” states Ghosh.  

DESPITE ARGUMENTs for including Indonesia, Cashmore believes people still need to be convinced about the case for the country, outside commodities. Yet, many fund managers and analysts feel it is only a matter of time before such a fund emerges anyway. 

“Industry talk has it that a number of Chindonesia focused funds will be launching soon, but another way to get a piece of the action is to pick individual products or a Chindia fund, then add your own exposure to Indonesia,” says Joshua Smith, a product specialist and vice president with RCM Asia Pacific.*   

RCM offers stand-alone funds on each country, and Smith says it was considering a Chindonesia fund. “The potential is large, and we have had a good track record, particularly in China and Indonesia. Our approach to Chindonesia is similar to a fund-of-funds approach, as leveraging the strengths and successes of our China and Indonesia franchises makes most sense.”  

As part of his research, Smith constructed a theoretical allocation based on the combined MSCI cap-weighted benchmark indices of the three countries. The allocation would be 66% China, 27% India and 7% Indonesia. Financials (33%) and energy (17%) would dominate, with telcos (10%), industrials (8%) and IT (8%) among other substantial investments. 

INDONESIA’S MAIN ISSUES are corruption and bureaucracy, while terrorism is also a threat. Yet, the main constraint is that the capital market is one of the smallest, particularly in terms of equities, relative to the domestic economy. Cashmore estimates the capital market at $230 billion for a $500 billion economy, which makes it smaller than Malaysia (a $250 billion capital market with a population a tenth of Indonesia’s). Ghosh believes rampant inflation could also be a threat to Chindonesia. “If inflation hits double digits, especially in terms of food, then the story could unravel. Inflation would be my main fear about Chindonesia, but of all the opportunities in the global equity landscape, I still believe this is the most robust.” 

* RCM is owned by Allianz Global Investors.