Copyright Bloomberg News
Faced with poverty, surging oil prices and terrorist threats, many of Indonesia’s 235 million people probably never noticed the milestone. Nor did many global investors, who care more about such things.
In April, Google surpassed Indonesia’s entire stock market in value.
Think about it. A seven-year-old company that produces no physical products is now more valuable than the equity of Southeast Asia’s biggest economy. Indonesia is an archipelago of about 18,000 islands holding oil and other resources that make the richest nations salivate. Google is, well, an Internet search tool.
In a note to clients, Mark Matthews, a director at Merrill Lynch in Singapore, asked this week: Which would you rather own, 100 percent of the Indonesian equities market or Google? For Matthews, 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.”
Matthews wonders if Google will go the way of Eli Whitney. “The cotton gin changed America,” 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 does all this have to do with Google?
“That’s sort of where Google is today,” 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 $92 billion and last year it had $3.2 billion in sales. Indonesia’s stock market is valued at $72 billion and its gross domestic product is $258 billion. Telekomunikasi Indonesia alone had sales of 33.9 trillion rupiah, or $3.3 billion, in 2004. In other words, one company that comprises just 14 percent of the Jakarta Composite index had more sales than Google.
Matthews concludes: Folks who buy Indonesia at current prices may do better than those who buy Google.
In 1998, for example, Microsoft’s market cap was bigger than South Korea’s. Now Microsoft’s is $272 billion and South Korea’s is $530 billion.
“If I could take a 7-year view on them, I would long Indonesia and short Google,” Matthews says.
Aficionados of the information age may fear Matthews is spending too much time in the tropical sun. The stock of the most-used Web search engine rose 62 percent this year alone. Clearly, people are making serious money off Google. And how many companies have seen their name become a verb?
Google comparisons aside, Matthews raises some interesting points about the state of the world’s fourth most-populous nation.
The aftermath of the Oct. 1 bombings in Bali has not been what their perpetrators might have expected. If the bombers who killed themselves and 19 other people had hoped to shake confidence in Indonesia’s economy, they failed miserably. The nation’s stocks are still up nearly 10 percent this year.
More importantly, Indonesia drew excess demand last week for its biggest overseas debt sale, and it plans to sell more 30-year bonds in 2006.
If investors viewed Indonesia as a basket case – which many did following the Bali bombings in 2002 and the attack on the JW Marriott Hotel in Jakarta in 2003 – would they really have placed $4.25 billion of orders for the $1.5 billion of 10-year and 30-year debt the nation sold? That demand prompted the government to increase the sale by 20 percent.
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 that President Susilo Bambang Yudhoyono is making progress toward reducing the budget deficit, protecting currency reserves and curbing corruption.
Risks do abound in Indonesia, an economy whose only real consistency is its ability to confound investors. The nation suffers from crushing poverty, terrorist threats and chronic inefficiencies. An Asia-wide outbreak of bird flu could hit Indonesia hard.
Yudhoyono says he is addressing problems that cost Indonesia the foreign direct investment it needs. This month, he almost tripled kerosene prices and more than doubled diesel tariffs to cap fuel subsidies and reduce the budget deficit.
While that is a tricky maneuver for any leader, it is particularly perilous in Indonesia. In 1998, the removal of subsidies fueled violent protests that toppled President Suharto. Yet Standard & Poor’s said on Oct. 3 that Yudhoyono’s move would spur investor confidence.
Even against a rival as formidable as Google, Indonesia may be a stronger bet than you think.