Indonesia: a red flag o a buying opportunity?

The Indonesian market has lately been under significant downward pressure, with the MSCI Indonesia down in € about 15% since the beginning of the year, and about 28% from its September highs.

For us, this weakness represents a buying opportunity.

Despite short-term volatility, Indonesia remains an economy with strong fundamentals and robust long-term growth prospects. The current correction has pushed equity valuations to irrationally low levels, further enhancing Indonesia’s attractiveness relative to other emerging markets like India, which continue to trade at significantly higher valuations. Indonesia’s small caps remain particularly attractive. Historically, when markets like Indonesia recover, they tend to deliver extraordinary returns.

We recognize that investors exposed to Indonesia may feel significant stress during phases like these, and we empathize with these concerns. However, for those with the ability to increase their exposure, we strongly advocate doing so. We are actively adding to our equity positions in NicheJungle Indonesian Infrastructure Small Caps SDG, reducing our cash balance in the fund, as we believe the risk/reward profile is highly compelling. This market is quite primitive, and extreme swings either side are often recovered quickly, offering good opportunities.

Factors Behind the Market Weakness & Our Perspective

1. Over-Discounting of Potential U.S. Tariffs

Investor sentiment has been weighed down by concerns over potential U.S. tariffs under Trump’s new administration. However, while tariffs remain a possibility, the market may be overestimating the risk for Indonesia. Even in a worst-case scenario, where tariffs significantly reduce exports to the U.S., the macroeconomic impact would likely be limited: Indonesia’s exports to the U.S. account for just 7.8% of total exports and 1.7% of GDP, meaning that while certain industries may face pressure, the broader economy would remain resilient. Additionally, Indonesia could redirect trade flows to China and other regional partners, mitigating potential downside risks. Finally, Indonesia’s geopolitical and strategic importance gives the U.S. strong incentives to maintain favourable relations, rather than risk pushing the country closer to its Nr 1 rival, i.e.: China.

2. Global Market Volatility & Currency Depreciation

The unpredictable nature of Trump-era policies has introduced substantial volatility across global equity markets. Emerging markets like Indonesia are particularly vulnerable to these fluctuations, leading to heightened short-term instability. For European-based investors, additional complexity arises from the performance of the Indonesian Rupiah. Bank Indonesia’s recent interest rate cut to 5.75% aims to stimulate economic growth but has also contributed to Rupiah depreciation against a strengthening U.S. dollar. While currency volatility can impact returns in the short term, it does not alter the long-term growth potential of Indonesia’s economy. The Rupiah is well supported by adequate foreign currency reserves, an independent central bank, low inflation and high real interest rates.

3. Political Uncertainty Under the New Prabowo Administration

The recent inauguration of President Prabowo has injected a degree of political uncertainty, as markets often adopt a cautious, wait-and-see stance during leadership transitions. Adding to this, his introduction of a “DOGE-like” program—aimed at reallocating resources from lower- to higher-priority political objectives — has contributed to further policy ambiguity. Prabowo’s ambitious goal of achieving 8% annual GDP growth over the next five years has also fuelled skepticism, particularly as Bank Indonesia has revised its 2025 growth forecast to a more conservative 4.7%–5.5%. This potential disconnect between expectations and reality may have disappointed some investors in the short term, but it does not detract from Indonesia’s long-term potential.

4. Revised Economic Growth Projections

While Bank Indonesia has adjusted its growth estimates, the economy is still projected to expand by approximately 5% in 2025, with inflation expected to remain contained at around 1.6%. These figures indicate a stable economic environment, despite external pressures. Investors should view these adjustments as part of the natural economic cycle rather than as indicators of fundamental weakness.

The valuation case

The Indonesian stock market continues to trade at a significant discount compared to India, creating an attractive risk-return profile for investors seeking exposure to emerging markets with solid fundamentals. For example, high quality companies such as Unilever Indonesia, Indocement (controlled by Heidelberg), and Indosat are currently trading at deeply discounted valuations, both in absolute terms and relative to their Indian peers – see the table below. Once considered big cap stocks, we are now purchasing them in our Indonesian Infrastructure Small Caps fund — a clear signal of how quality assets are absurdly undervalued in the current Indonesian market context.

Emerging Markets as a Diversification Strategy

Investing in Indonesia provides significant diversification benefits, particularly in the context of an expensive and concentrated U.S. equity market. Contrary to conventional wisdom, emerging markets like Indonesia do not exhibit beta coefficients consistently above 1 relative to the U.S. market. As a result, they are less correlated with major global indices and can help reduce overall portfolio volatility.

Conclusion

The recent decline in the Indonesian market is primarily driven by external factors and short-term uncertainties. However, strong economic fundamentals, attractive valuations, and long-term growth prospects make Indonesia an appealing investment opportunity for those looking to diversify their portfolio and capitalize on the potential of emerging markets.

Periods of market stress often present the best buying opportunities. For those who can withstand short-term volatility, increasing exposure to Indonesia at current levels could lead to significant long-term returns. As portfolio managers, we are actively increasing our equity positions in Indonesia, confident that, in the end, the market will reward patience, conviction, discipline, and diversification.

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This is a marketing communication intended exclusively for institutional investors.

Please consult the Fund Prospectuses and KIDs before making any investment decisions.

Make Indonesia Great Again

Embraced now by none other than the world’s most developed economy, i.e. the United States, import substitution used to be the development strategy of choice for many lower-income emerging economies across Latin America, Asia and Africa.

The approach aimed at reducing reliance on imported goods, thus boosting domestic production, creating jobs, building know-how, preserving currency reserves and securing economic sovereignty.

Indonesia is no stranger to this strategy.

Since the election of President Jokowi Widodo in 2014, and now under President Prabowo Subianto, the country has steadily pursued this path with renewed determination.

We don’t need no education. We want manufacturing

Consistent with this approach, this week Indonesia’s Government has rejected Apple’s offer to invest about US$100m in “Apple Academies” – aimed at training local talent – in order to lift the sales ban on the iPhone 16 imposed by the Ministry of Industry (see here).

Why? Indonesia requires all electronic devices with cellular connectivity to include at least 35% of locally produced components, a policy designed to spur the growth of the domestic high-tech manufacturing sector.

Industry Minister Agus Gumiwang Kartasasmita has summed it up well: “We recommend Apple consider developing manufacturing facilities in Indonesia.” He emphasized that Apple’s proposal fell short compared to contributions from other smartphone brands already manufacturing in the country, particularly in terms of added value, tax revenue, and job creation.

So what? The bigger picture

Import substitution is part of a broader Government strategy, which includes also Indonesia’s push for “downstreaming” in the commodity sector, and attempts to take advantage of the gradual reconfiguration (or “re-shoring”) of Western supply chains away from China.

These drivers should position Indonesia as prime destination for inward foreign direct investment (FDI), which is one of the reasons why we are optimistic about Indonesia (especially about undervalued small & mid-caps exposed to the Government’s massive infrastructure development programme). See here if interested in our investment case.

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This is a marketing communication intended exclusively for institutional investors. Refer to the Fund Prospectus & KID before making any investment decision.

EVs are just going to win

At the beginning of this year, the headlines were all about a supposed slowdown in electric vehicle sales. EV sceptics — and there are plenty of them — claimed EVs were just a passing fad, that EV issues were insurmountable and that they’d never thrive without subsidies. The “EV revolution” was supposedly dead.

Fast forward a few months, and that narrative has crumbled. In fact, the writing is now on the wall: EVs are simply a much superior technology and will eventually replace internal combustion engines – as the always insightful Noah Smith points outs here.

We have been thinking the same for over a decade now. And that’s why our PMs have launched the first ever electric mobility fund in the world back in 2015.

Today, at Niche AM, they continue to manage a flexible electric mobility fund that provides exposure to the entire EV battery ecosystem, seeking to identify e-mobility players not yet recognised as such by the market, and betting on a potential re-rating.

Niche AM’s Electric Mobility Value Niche invests thus in this growth theme with a value approach, which helps avoid bubbles while reducing volatility and downside risk.

For further details on our unique Electric Mobility fund see here.

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This is a marketing communication intended exclusively for institutional investors. Refer to the Fund Prospectus & KID before making any investment decision.

South Korea makes it to WGBI

This week, FTSE Russell announced the results of its semi-annual bond index review, and the big news are that South Korea will be included in the index provider’s flagship World Government Bond Index. See here.

This is a big deal for bond markets, probably the most widely used global government bond index, followed by an estimated US$2.5tn. According to Goldman, the inclusion should attract ∼$65bn into South Korea’s govvies, driving yields lower.

Why should we care about this as investors in South Korean equities?

For 2 reasons. Firstly, because of the benefits on the wider economy and corporates from easier financing conditions and lower yields. Secondly, and of much greater importance, because FTSE Russell’s inclusion may signal a future move by MSCI to do something similar in equities, i.e. including South Korean equites into its Developed Market Indices (something which FTSE Russell has already done back in 2010).

MSCI’s reclassification could draw ∼US$50bn into South Korean equities, and spark a significant rally.

As noted on the FT, “this might seem like a weird, niche thing only of interest to indexing dorks….but the reality is that benchmarks are increasingly influential in deciding global capital flows, and their importance is only going to grow”.

We view MSCI’s potential reclassification as a pivotal catalyst for South Korean equities.

Clearly this is not the only, nor the most important reason to buy South Korean equities.

As value investors we are mainly attracted to this market for its exceptionally low valuation and discount vs other major markets, with the KOSPI currently trading at 8.5x 2024 EPS and even below book value, vs the ∼2x book value of the NIKKEI, the ∼3.7x of the SENSEX & the almost 5x of the S & P 500. Our South Korean portfolio is even cheaper, trading at an average of ∼6x EPS despite being composed of good quality corporates with relatively low or no debt.

South Korea offers an interesting alternative to the Chinese and Indian stock markets, which trade at much punchier 12x and 24x EPS respectively. Relative to China’s, then, you get these extremely attractive stocks without all the risks associated with its big neighbour, such as regulatory uncertainty, deglobalisation, friend-shoring, Taiwan, a real estate bubble and a financially stressed system.

Unlike the KOSPI, in our portfolios we give significant exposure to companies exposed to the domestic mkt, particularly in the infrastructure and consumer sectors. We reckon these sectors would benefit the most from potential reforms in North Korea along the lines, for example, of what has happened in China or Vietnam in the last 20 years, which could or could not, in the very long term, lead to the reunification of the country. This would represent a significant opportunity for South Korean domestic equities, to which the market is currently assigning a probability close to zero.

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This is a marketing communication intended exclusively for institutional investors. Refer to the Fund Prospectus & KID before making any investment decision.

Developed or still emerging?

According to Nobel Prize-winning economist Simon Kuznets, countries can be categorized into four types: developed, undeveloped, Japan and Argentina. Perhaps he should have added a fifth type: South Korea.

South Korea boasts the 14th largest economy globally and ranks in the top decile worldwide for GDP per capita. It’s a member of the OECD since 1996, while the IMF has classified it as an advanced economy already in 1997. Its stock market is the 12th-biggest globally, with a capitalisation of about $1.8trn, ahead of the likes of Italy and even Switzerland. The country leads the world in R&D investment relative to GDP. The West heavily depends on South Korea for semiconductors, smart phones and smart TVs, while greatly enjoys its pop music, films and food.

Since the 1980s, the country has also transitioned into a modern Western-like democracy, curbing corruption and limiting the economic and political dominance of chaebols.

And yet, despite possessing nearly all the hallmarks of a developed market, MSCI has once again, back in June, reclassified South Korea as an “emerging market”. Click on image below for details.

MSCI is primarily concerned about the convertibility of the Korean won in the currency market and is also unhappy with the full ban on short selling reintroduced in November 2023.

MSCI’s classification as emerging market probably contributes to what is known as the South Korea "discount" – a term describing the underperformance/undervaluation of local stocks compared to other global equity benchmarks.

A discount which is probably also the result of other factors, such as an exaggerated perception of the military threat from North Korea (are investors not investing in German stocks due to its proximity to Russia?); poor corporate governance within South Korean conglomerates; and the inaccessibility of South Korean stocks for non-domestic retail investors.

While we can't predict when (or even if) MSCI will upgrade South Korea to "developed market" status, it's worth noting a couple of things.

First, the country is already, albeit gradually, easing restrictions on the currency market (where the heavy regulatory focus reflects the comprehensible hyper-vigilant mindset forged in the wake of the capital flight and won collapse witnessed during the Asian Financial Crisis of 1997).

Second, while inclusion in MSCI’s Developed Market index is estimated by Goldman Sachs to potentially lure some US$46bn-56bn of fresh capital into South Korean assets, an investment case for South Korea doesn't need to hinge on MSCI's reclassification.

As value investors, our investment case for South Korea is primarily based on valuation.

As of today, approximately 29% of the Korean listed market trades below tangible asset value. This percentage increases to around 65% when considering the number of companies rather than their market weight.

This misvaluation significantly impacts all companies, particularly medium and small caps (which in fact have basically not moved over the past decade).

South Korea offers a compelling alternative to the Chinese stock market. Probably much more compelling than arguably expensive India. Despite China's poor stock performance in recent years, South Korea is trading at about 9.9x 2024 earnings, vs. China’s 11.7x circa (and India’s >23x).

And this lower valuation comes without all the risks related to China, such as policy uncertainty, deglobalization / reshoring / friendshoring, Taiwanese tensions, a real estate bubble, and a stressed financial system.

Imminent policy measures should gradually help close the South Korean discount. Last February, the government announced the so-called Value-up Plan, final details of which should be available shortly.

Click on image below for details.

The plan will allegedly offer tax incentives to companies that implement measures to enhance investor communication and governance, with the aim of focusing investor attention on hundreds of undervalued companies.

It appears that participating companies would be able to tax deduct 5% of any increase in shareholder returns (i.e.: dividends and buy-backs) over and above the average of the previous three years. There would also be a reduction in personal tax on dividend increases, from 45% to 25% (or from 14% to 9% for small shareholders).

For Chaebols and family businesses that typically do not distribute dividends, these measures would represent an opportunity to issue extraordinary dividends over the next two years. Even large companies will be motivated by shareholders to increase their currently low payouts.

Companies that join the program and meet the plan’s minimum communication and governance standards, would apparently be included in specific indices and become thus eligible for investment by pension funds and insurance companies.

At Niche AM, we view South Korea’s companies as exceptionally compelling opportunities, both in terms of valuation and business fundamentals.

This is the reason why our NEF Ethical Global Trends SDG fund is significantly overweight South Korea, which represents 11% of the portfolio vs the meagre 1% held by benchmark MSCI ACWI Value. This overweight position sharply contrasts with NEF EGT's minimal 0.13% exposure to China, exposure which the fund has been actively reducing since 2022, when Niche AM adopted the policy of not investing in countries deemed as autocracies by Freedom House.

NEF Ethical Global Trends holds 33 South Korean stocks, trading at an astonishingly low multiple of around 7x earnings (yes, 7x—it’s not a typo) and well below tangible book value.

These companies aren’t just cheap. They are also companies with good ESG profiles, which are making a positive contribution to achieving the UN’s Sustainable Development Goals (consistent with the classification of the fund as an Article 9 SFDR).

And we know this because at Niche AM we conduct rigorous sustainability analyses, both quantitative and qualitative. Once in the portfolio, we ensure that companies demonstrate a consistent improvement in sustainability over time. If a company deviates from its improvement trajectory, we actively engage with management to understand and address that deviation directly. If the deviation is not justified and/or the company does not return onto an improving trajectory within a reasonable time, the stock is sold as soon as allowed by market conditions.

The 33 South Korean names in our NEF EGT portfolio have been carefully selected based on this comprehensive sustainability process. The selection was made from an initial pool of approximately 150 South Korean firms, which themselves were shortlisted from around 2,500 listed companies on the basis of valuation and liquidity.

The chart below illustrates the mostly improving sustainability performance and responsiveness of South Korean companies in NEF EGT’s portfolio between 2021 and 2023.

As value investors, we don't wait for "catalysts" before investing, primarily because once a catalyst becomes apparent or obvious, it is often too late to invest.

However, if pressed to identify potential catalysts for South Korean stocks, we would mention the MSCI reclassification discussed above and (probably more impactful in terms of upside potential), any reform in North Korea on the lines, for example, of what took place in China or Vietnam over the last 20 years.

Any change in the northern neighbour represents an opportunity to which the market is currently assigning zero probability, and it would hugely benefit this segment of NEF EGT’s portfolio, predominantly composed of companies deeply integrated into the peninsular economy.

See here for further details on NEF Ethical Global Trends SDG.

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This is a marketing communication intended exclusively for institutional investors.
Refer to Fund Prospectuses & KIDs before making any investment decision.

Japanese Secrets

In Japan, shinise (literally “old shops”) are long-established businesses that have been in operation for at least a hundred years – some even more than a thousand years.

These businesses have endured nuclear wars, earthquakes, tsunamis and depressions, and yet, as explained here by Morgan Housel, they keep going on, generation after generation.

Japan is in fact the country with the biggest number of such old businesses, with their products and services clearly enjoying immense prestige (one of these being for example the household brand-name Nintendo).

What is their secret?  The reasons for their success are probably many, but there is one that could surprise those used to Western-style capitalism: these Japanese companies hold tons of cash, and no (or very low) debt.

Low leverage certainly helps survival.  As illustrated by Housel, with no debt, the number of events a company can withstand might fall within a range that looks like this:

A few catastrophic events might hurt, but you are likely to survive.

With more and more debt, says Housel, the range of events you can survive shrinks until you are toast:

What’s all this got to do with us?

At Niche AM we run a Japanese fund that invests in what we call “orphan companies”, i.e.: companies not covered by the sell-side and thus significantly undervalued.  But lack of broker coverage is just one of the features of our fund.

As deep value investors, we can’t but appreciate the business approach of shinise.  And consistent with that view, in our portfolio we only hold companies which -like shinise – are net cash positive.  In fact, the companies in our Japanese Orphan Companies fund have roughly, on average, 10% more cash than their market cap:

For further details on our Japanese fund see here.

This is a marketing communication intended exclusively for institutional investors.

Refer to Fund Prospectuses & KIDs before making any investment decision.

For any questions email us on: info@nicheam.com

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