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Indonesia's Stock Exchange (IDX) redoubled efforts in recent years to deepen the emerging economy's capital markets. Access to funding through stocks and bonds is vital for local businesses to grow stronger ahead of the launch of the ASEAN Economic Community (AEC). Indonesia also needs to expand the local investor base to reduce the capital markets' exposure to cross-border capital flows. In a bid to increase issuance, trading volumes and liquidity, IDX – in cooperation with Indonesia's Financial Services Authority (OJK) – has been busying itself with extending trading hours, improving trading mechanisms, simplifying issuance procedures, allowing new investment products, standardising reporting requirements, reinforcing corporate governance and educating the public on the benefits of investing in listed securities.
These efforts have not been in vain. The number of listed companies, total stock market capitalization and daily trading value are all on the rise. The growth of Indonesia's capital markets has not been lost on global investment funds, but it is local players that have most to gain from the rising momentum on their home turf, as the market's relatively low penetration with asset management services points to ample scope for expansion.
IDX has witnessed considerable growth over the past few years in terms of securities issued. In total, Rupiah-denominated funds worth 411.90 trillion RP were raised in 2014, up from 383.09 trillion RP the previous year and 270.66 RP in 2011. The increase was primarily due to the growing issuance of government bonds and sukuk (See The Rise of the Sukuk in Indonesia’s Islamic Finance Industry), with equities and corporate bonds displaying no conclusive trend.
IDX Funds Raised (trillion RP)
Source: IDX
IDX listed 506 equity issuers with a total capitalization of 5,228 trillion RP at the end of 2014, up from 440 companies valued at 3,537 trillion RP three years earlier. The average daily stock trading value also rose significantly, namely from 4.95 trillion RP in 2011 to 6.01 trillion RP in 2014. The devaluation of the Rupiah, however, did have some repercussions on the market in 2014, with trading volumes and the number of initial public offerings (IPO) declining compared to the preceding year.
At less than 50% of the country's annual GDP, Indonesia's stock market capitalization remains relatively low. For instance, regional peers Malaysia and Singapore, though much smaller than Indonesia in terms of population, have a greater number of listed companies, and their combined market value of listed companies far exceeds national annual GDP.
Stock Market Statistics
Source: IDX
IDX recorded a record net inflow of foreign funds amounting to almost 43 trillion RP in 2014. The government and IDX are encouraging Indonesians to invest in stocks and bonds in a bid to alleviate the country's dependence on foreign funds and reduce the volatility of the Jakarta Composite Index. Greater engagement of local investors in the capital market is also seen as important to boost Indonesia's global competitiveness. For the time being, foreigners still control a majority of the Indonesian capital market; holding 59% of IDX-traded securities at the end of 2014, which is down from 65% in 2011.
Mutual funds have set out to change this and are finding themselves in a highly attractive market, as Indonesians grow more comfortable with investing in stock market securities (See Overview of Indonesia's Mutual Fund Industry). New technologies such as online banking and mobile trading bring the stock market close to home, while the internet also helps Indonesians educate themselves about investment products and how to get started (See Improving Internet Access in Indonesia). Bareksa.com, for example, is an Indonesian startup that affords visitors direct access to mutual funds from a growing number of investment managers. The portal also provides market news and editorial content for novice investors.
As is the case for Indonesia's capital markets in general, the penetration with mutual funds is very low compared to other countries, particularly more developed economies. The total amount of money invested in funds at the end of 2014 was 241.57 trillion RP, according to the Financial Services Authority (OJK). This equates to around 2% of GDP, far below the ratios common in most other developed economies. It is estimated that just a little over one in a thousand Indonesians are invested in mutual funds. Rising personal incomes and changing mindsets, however, provide fertile ground for what could become a flourishing funds industry.
Combined Net Asset Value (NAV) of Mutual Funds in Indonesia:
Source: Financial Services Authority (OJK)
While global investment firms (through Indonesian subsidiaries) still dominate the market in terms of assets under management, their local competitors are beginning to steal the show in terms of performance. The Mutual Funds Association of Indonesia (APRDI) and financial media company Bloomberg in March 2015 bestowed awards on Indonesia's “best performing funds” in various categories:
2015 APRDI-Bloomberg Indonesia Fund Awards
Source: bloomberg.com
The industry is seeing some consolidation as smaller players need to grow stronger to take on their larger competitors. Mergers and acquisitions are also one of the easiest ways for foreign companies to enter the market, since it can help them to overcome the fundamental challenge of building a distribution network.
Infrastructure-focused mutual funds should have a bright future in Indonesia. The country's development roadmap foresees the construction of roads and railway lines, airports and seaports, power plants, pipelines and more on a massive scale by 2025, which will cost hundreds of billions of dollars. In his election campaign in 2014, President Joko Widodo made infrastructure one of the most important items on his political agenda, if not the most important. While the new administration has begun to shift spending from other budget items (notably fuel subsidies) to infrastructure development, the state and state-owned enterprises will only be able to provide a minority of total funds needed. This leaves the lion’s share to the private companies, who in turn rely on stocks and bonds for much of their funding. That is good news for local mutual funds that invest strongly in the financing or construction of domestic infrastructure projects, such as Bahana Dana Infrastruktur by Bahana TCW Investment Management.
Local investment managers should also be able to take advantage of increasing pension savings and health insurance premiums. Therefore, while Indonesia's capital markets still lag behind the country's general economic development, a growing economy, young population and increasing cross-border investment in Southeast Asia means the country has what it takes to build a thriving mutual funds industry.
Global Business Guide Indonesia - 7th May 2015
Bourse Name: Bursa Efek Indonesia (IDX)
Main Index: Jakarta Composite Index
Market Capitalisation: 5.6 trillion IDR July, 2016)
Annual Performance: 11.97% (2016)
Record High: 5,523.29 (April 2015)
Number of Issuers: 523 (2015)
Top Stocks by Market Capitalisation: HM Sampoerna, BCA, Telkom, Unilever, BRI, Astra International, Bank Mandiri, Gudang Garam, BNI.
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