I have just come back from a whistle-stop tour of Jakarta and its environs in the company of our Thai-based colleague, James Cotton, and the Jakarta-based fund manager, HB Capital Partners. Whilst my passport is gradually filling up with visas required for each trip to Indonesia, it is well over a decade since I last visited the capital of what is now the third most populous nation on earth.

1)?The City?- Jakarta is a city of over 20 million people during the day, when in spite of the wide Dutch-built boulevards from the go-go years of the Suharto regime, the arteries of the city become clogged with cars, taxis and scooters. At night people filter out into the surrounding dormitory towns and the population shrinks to a mere 8 million.

Arrival at the airport, and the drive into town (which incidentally can take anything from 40 mins to 2 hours 40 mins depending on the time of day, remind me of Sao Paolo or Bangkok. Regional travel has however become affordable and more efficient owing to the proliferation of budget airlines, none more so than the excellent Air Asia which has recently moved its regional head quarters to a spanking new Terminal 3 facility. Notwithstanding the plans for numerous new toll roads in and out of the city, the mayhem that awaits one in this vast metropolis is clearly an impediment to efficient business. Fortunately, and unusually for the developing world, only an estimated 20% of Indonesian GDP is reliant on Jakarta (whereas for example Greater Bangkok would account for at least double that of the Thai economy), with resource rich provinces such as East Kalimantan producing significant chunks of national income.

2) Politics – We arrived on the day the polls opened for the mayoral election. Our timing could not have been better. By the end of the day, it was clear that charismatic rising star, Joko “Jokowi” Widodo had won the mayoral elections. Jokowi is perceived as a reformer and is unusually untainted by the corruption that plagues Indo-politics. Nonetheless, he has been hijacked by a party affiliated with former Suharto-era generals claiming him as a talisman for probity and good governance, albeit he is clearly very popular with Indonesian voters. Meanwhile, former general, Prabowo Subianto, a presidential candidate in the forthcoming 2014 election, is widely regarded as a throw back to that old era.

The system of patronage, so engrained in the political psyche of so many incumbent politicians, has recently engulfed the once reformist President Susilo Bambang Yudhoyono, better known as SBY. Unfortunately, the huge infrastructure investment and public private initiatives so desperately needed across the country have ground to a halt, with the government lethargy apparently attributable to a lame duck President?preoccupied with scandals that have embroiled government ministers and even his own family. There is nonetheless talk in some quarters that his wife Ani could stand as a Presidential contender.

Rumours that Jokowi could yet stand in 2014 seem far-fetched but things can change quickly when popular opinion dictates. Despite the inexorable wait for infrastructure spending to get approved, the economy is chugging along at 6%+, fueled by a very young population and the multiplier effect of the surge in national income and investment seen in recent years.

3) Economics – Indonesia has gained enormously from the resources boom and is a major supplier of coal and other resources to China and India. The signs of a building boom were evident across the city, a rising middle class has emerged and all manner of consumer led growth is on show. We visited a listed bakery business, Sari Roti, which is rolling out 2 to 3 new facilities per annum, and yet probably could do twice this, leveraging rising brand awareness as it expands its footprint, and as retail chain formats expand. The shares nonetheless look expensive on a prospective P/E in the 20s but the growth curve is clear.

Similarly we visited a grandiose and vast mixed housing, lifestyle, and leisure development on 40-odd square miles of land in the uplands south of Jakarta, encompassing several golf courses, a private hospital and a theme park, “Jungleland” due to open in early new year. Funded by Bakrie money, central players at the heart of the patronage system described above, I was reminded of the subsequent implosion of confidence in their London-listed vehicle, Bumi Resources, just days after my return, of the risks of such speculation.

Indonesia, (unlike China), is at the stage of development where it is experiencing current account deficits as the economy sucks in imports. However, the investment-led economy is still producing strongly positive returns on investment without the proverbial roads and bridges to nowhere. In turn, this investment is fueling consumer spending growth. That should protect the currency from the sort of instability for which it has historically been vulnerable, and indeed Indonesian Government bonds, offering 6% yields, are still apparently attractive, at least in relative terms to the zeros and worse, available in the “safer” western world.

4) Markets – Indonesia has been a growth star since 2004, the upside has been tenfold. But to understand this, one has to look back to the Asian crisis of 1998, which, not unlike the present European malaise, brought about a wholesale collapse in the banking system, and a 15-year hiatus in the investment cycle coupled with a total withdrawal of FDI for more than a decade. Only when glimmers of recovery started to manifest themselves, did the tiny equity market cap start to take off. And even today, concerns over a slowdown in China and a current account deficit do not look as if they will derail the Indonesian miracle.

5) Asset Management – Ironically, the two biggest players in the country are not indigenous. Schroders and BNP Paribas top the rankings, but the most promising local players, a subsidiary of leading government-owned bank, Mandiri Investasi impressed us with their professionalism and performance record. We see little chance of a boutique manager claiming much of the international capital that is clearly waking up to the Indonesia – and indeed the ASEAN- story, as keyman risk and lack of operational depth are too evident for the institutional investor. For more information on how to invest more safely in Indonesia, email asia@milltrust.com
Simon Hopkins, CEO Milltrust Interntional Group