Choose Indonesia over Google
COMMENT Search engine’s market cap bigger than Asian nation
Faced
with poverty, surging oil
prices and terrorist threats, many of Indonesia’s 235 million people probably never noticed the milestone. Ditto for global investors, who care more about such things.
In April,
Google Inc. surpassed Indonesia’s entire stock market in value.
Think about it. A seven-yearold company that produces no physical products is now more valuable than the equity of Southeast Asia’s biggest economy. Indonesia is an archipelago of some 18,000 islands holding natural resources — including oil — that make the world’s richest nations salivate. Google is, well, an Internet search tool.
It raises an intriguing question, and one Mark Matthews, a Singapore-based director at Merrill Lynch & Co., posed this week in a sales note to clients: Which would you rather own: 100% of the Indonesian equities market or Google?
A bit existential perhaps, but a question that focuses the mind and gets at a bigger point. Mr. Matthews’ take on it? Indonesia is the clear winner.
“Indonesia is a hairy asset to be sure,” he wrote. “It has African levels of corruption, thousands of islands spread out over three time zones, Islamic extremists. But judging by the market’s ability to withstand the most recent mini-crisis and Bali bombs, this is in the price. So there is upside if they can eventually get it right. And it is something real.”
Mr. Matthews can’t help but wonder if Google will go the way of inventor Eli Whitney. “The cotton gin changed America,” Mr. Matthews wrote. “It revitalized the South and boosted the British textile industry, and had a thousand other effects. And this earned the inventor, Eli Whitney, almost nothing.”
What’s all this got to do with Google? “ That’s sort of where Google is today,” Mr. Matthews wrote. “Google has a small lead over a pack of competitors, all eager to fight for one of the few remaining high-margin zones left in tech-land. Does Google management know that the supply of advertising space on the Internet is unlimited?”
Google’s market cap is US$92billion and last year it had US$3.2-billion in sales. Indonesia’s stock market is valued at US$72-billion and its gross domestic product is US$258-billion. PT Telekomunikasi Indonesia, the nation’s biggest telephone operator, alone had sales of 33.9 trillion rupiah ( US$3.3-billion) in 2004. In other words, one company that’s just 14% of the Jakarta Composite Index had more sales than Google.
Mr. Matthews’ basic conclusion is this: Folks who buy Indonesia at current prices may do better than those who buy Google.
In 1998, for example, Microsoft Corp.’ s market cap was bigger than South Korea’s.
Now Microsoft’s is US$272-billion and Korea’s is US$530-billion. “If I could take a seven-year view on them, I would long Indonesia and short Google,” Mr. Matthews says.
Aficionados of the information age may fear Mr. Matthews is spending too much time in the tropical sun. The stock of the most-used Web search engine (GOOG/NASDAQ)
rose 62% this year alone. Clearly, people are making some serious money off Google. And how many companies have seen their name become a verb?
Google comparisons aside, Mr. Matthews raises some interesting points about the state of the world’s fourth most-populous nation.
The aftermath of the deadly Oct. 1, 2002, bombings in Bali hasn’t been what their perpetrators might have expected. If the hope of the suicide bombers who killed themselves and 19 other people was to shake confidence in Indonesia’s economy, they failed miserably.
That Indonesia’s stocks are still up nearly 10% this year is one sign. A more important one is that Indonesia drew excess demand last week for its biggest overseas debt sale, and that it plans to sell more 30-year bonds in 2006.
If investors viewed Indonesia as a basket case — which many did following the 2002 Bali bombings and the 2003 attack on the JW Marriott Hotel in Jakarta — would they really have placed US$4.25-billion of orders for the US$1.5-billion of 10- and 30-year debt it sold? That demand prompted the government to increase the sale by 20%.
While the yields Jakarta is paying are higher than those offered in April, they were at the bottom of the range marketed to fund managers. The demand reflects confidence President Susilo Bambang Yudhoyono is making progress toward reducing Indonesia’s budget deficit, protecting currency reserves and attacking corruption.
Risks indeed abound in Indonesia, an economy whose only real consistency is its ability to confound investors. The place has crushing poverty, terrorist threats and chronic inefficiencies. And those are just the concerns investors focus. Any Asiawide outbreak of bird flu, for example, could hit Indonesia hard.
Mr. Yudhoyono says he’s tackling the problems that cost Indonesia the foreign direct investment it needs. Earlier this month, he almost tripled kerosene prices and more than doubled diesel tariffs to cap fuel subsidies and reduce the budget deficit.
While a tricky maneuver for any leader, that’s a particularly perilous one in Indonesia. In 1998, the removal of subsidies fueled violent protests that toppled President Suharto. Yet Standard & Poor’s on Oct. 3 said Mr. Yudhoyono’s move was “encouraging” and will spur investor confidence.
It’s a reminder that in any Google versus Indonesia debate, Asia’s No. 7 economy may not be as bad a bet as you think. North Americans willing to place a bet can invest in Indonesia through the closed-end Indonesia Fund ( IF/ NYSE).