Inflation Beater, E&R Indonesia 30!
Inflation Beater E&R Indonesia 30
Let’s assume Inflation and Interest rates are going to rise for the rest of your investing life. This may be a low-probability scenario for some, but let’s just assume this is a realistic future. Anything near 20% is considered Hyper Inflation and your portfolio has a low chance to beat this inflation, if you are.
1] Not owning commodities
2] Not owning commodity-based emerging economies
3] Not owning alternative energy economies
4] Invested in an MCAP Index ETF
5] Not tactically diversified
6] Paying Upfront Annual Recurring Management Fees
7] Doing stock selection
8] Geographically biased
9] Look at stock markets all-day
10] Not invested in E&R Indonesia 30
The Indonesian economy ticks many boxes
1] It has a growing economy: Indonesia has one of the largest economies in the world and is expected to continue growing at a steady rate in the coming years. 2] Large population: With a population of over 270 million, Indonesia is one of the most populous countries in the world, which provides a large potential market for investors. 3] Young and growing middle class: The country has a young and growing middle class, which is expected to continue to expand in the coming years, creating new opportunities for investors. 4] Strategic location: Located in Southeast Asia, Indonesia is strategically positioned as a gateway to the region, with access to markets such as China, India, and Australia. 5] Abundant natural resources: Indonesia is rich in natural resources, including coal, oil, gas, and minerals, which provide opportunities for investment in the energy and mining sectors. 6] Pro-business policies: The government has implemented pro-business policies to attract foreign investment, such as simplifying regulations and reducing bureaucratic barriers. 7] Strong economic growth potential: Indonesia’s strong economic growth potential is attracting the attention of international investors, who are increasingly looking to diversify their portfolios. 8] Diversified economy: Indonesia’s economy is diversified, with a mix of industries including agriculture, manufacturing, and services, which helps to mitigate risk. 9] Improving infrastructure: The government has made significant investments in infrastructure, including roads, ports, and airports, which is expected to boost economic growth. 10] Attractive valuations: Indonesian stocks are currently trading at attractive valuations compared to other emerging market economies, which provides an opportunity for investors to access the market at a lower cost.
Indonesia vs. India
1] Historical Performance: Over the past 10 years, both Indonesia and India have delivered strong returns for investors, but Indonesia has outperformed India. Indonesia index has delivered an annualized return of 9.5% compared to India’s 7.2% according to popular benchmarks. 2] Correlation: The correlation between the Indonesian and Indian stock markets is relatively low, which means that adding Indonesian equities to an Indian portfolio could help to diversify risk. 3] Commodity exposure: Both countries have significant commodity exposure, with Indonesia being a major exporter of coal, palm oil, and rubber, while India is a major importer of oil and has a large domestic consumption of gold. 4] Currency risk: Both the Indonesian rupiah and the Indian rupee have historically been volatile against the US dollar. However, Indonesia’s central bank has a reputation for being more proactive in managing its currency than India’s central bank. 5] Liquidity: The Indonesian market has improved liquidity in recent years, but it still lags behind India’s larger and more developed market. This could potentially affect the ease of buying and selling Indonesian stocks for investors. 6] Market size: The Indonesian market is getting ready to join India soon in the $ trillion club. India leads Indonesia now with a market capitalization of over $2 trillion compared to Indonesia’s market cap of around $600 billion.
MCAP methods underweight Indonesia
Market Capitalization Weighted Methodology [MCAP] Index on any asset class or any region will be concentrated, not designed for diversification, more risky, will be winner biased, and hence not designed to allocate into future winners. This is true, even if we look at Indonesia. As of January 2023, Indonesia weights a minuscule 3.2% in the MSCI Emerging Markets Index.
Concentration can’t beat inflation
As of January 18th, 2023, the weights of the top 5 companies in the Jakarta Composite Index (JCI) i.e. Bank Central Asia (BCA): 14.27%, Astra International: 9.47%, Bank Rakyat Indonesia (BRI): 8.96%, Bank Mandiri: 7.45%, Telkom Indonesia: 5.27%. Therefore, the total weight of the top 5 companies in the JCI is 45.42%. You can not concentrate all your portfolio in a few stocks and expect to deliver significant risk-weighted returns.
Tactical Diversification
Looking at a combined portfolio of Indian and Indonesia might not seem like tactical diversification, but if you look at them closely, the correlations between the two emerging markets are low. When we combine two assets with low correlation in a portfolio, we can reduce the overall portfolio’s volatility and potentially increase returns by diversifying the risk. This is because the two assets will not always move in the same direction at the same time, so losses in one asset may be offset by gains in the other asset.
Poor Investment Habits
The following poor investing habits can not assist in beating hyperinflation. Passive investors need to stop doing the following. 1] Pay upfront annual recurring management fees for their Index Fund or ETFs. 2] Do stock selection. 3] Stay geographically biased. “I am an American, I only Invest in America.” 4] If you look at stock markets all day, passive Index investing is not for you.
E&R Indonesia 30
The story of Inflation beating Indonesia actually starts with Exceptional & Rich Indonesia 30 Index. E&R Indonesia 30 Open Index beat the Jakarta Composite Benchmark which is based on MCAP concentrated methodology by a whopping annualized 25% on a risk weighted basis. This means an annualized simulated performance of 30% since January 2016, hence the name, “The Inflation Beater”.
E&R Indonesia 30 has been created to improve the statistical and scientific design flaws of the market capitalization methodology used in the Jakarta Composite Index, which is widely regarded as the best single gauge of large-cap Indonesia equities. Unlike market capitalization methodology which is risk-increasing and return-reducing owing to its concentration, the E&R’s [3N] methodology is designed to own 30 large-cap Indonesian equities, and deliver higher risk-weighted excess returns while maintaining low tracking error vs. the Jakarta Composite Index.
Exceptional & Rich Indonesia 30 Index Factsheet
Github Codebase and Methodology
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Past performance is no guarantee of future results. All results shown are based on simulated performance and are without fees and expenses typical of managed accounts which would reduce performance. Nothing contained on this website is intended to constitute legal, tax, securities, financial or investment advice, nor an opinion regarding the appropriateness of any investment. No part of the website material may be duplicated in any form and/or redistributed without prior written consent. All website information, current or historical, is believed to be reliable, although its accuracy and completeness cannot be guaranteed.
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