Growth momentum shift to Emerging Markets continues

Two weeks ago I highlighted the fact that Indonesia has re-attained an investment grade rating, continuing the upward path it has been on since the Asian crisis derailed the Asian growth story 15 years ago. Indeed, we should expect emerging markets, and Asian emerging markets in particular to outperform developed economies. And that means overweighting EM now that the EM market correction has occurred.

Here’s a BBC story on Indonesia that underscores the appeal:

Indonesia’s economy grew at its fastest pace in 15 years in 2011 boosted by increased investment and growing domestic demand.

Southeast Asia’s largest economy expanded by 6.5% in 2011, the highest rate since 1996.

Indonesia also regained its investment grade status last year as total domestic and foreign investment rose by almost 20% to $28bn (£18bn).

Analysts said growth was likely to remain strong going forward.

The latest data also showed that the economy grew by 6.5% in the October to December quarter from a year earlier.

Raddhika Rao of Forecast said the strong data "validates the government’s optimism on the growth front, driven for the most part by robust consumption and investment spending".

‘Least exposed’

The data comes at a time when problems in the eurozone and the US have seen considerable uncertainty in the global economy.

As the eurozone struggles to find a solution to its debt crisis and the US copes with a high rate of unemployment, demand from two of the biggest economic zones in the world has been falling.

That has hurt many Asian economies that rely heavily on exports for growth.

However analysts said that Indonesia has benefited from the fact that a huge part of its growth is driven by domestic consumption.

"Indonesia is one of the least exposed economies in the region, with a vast domestic market and a relatively small share of exports to gross domestic product, so it is insulated from volatility in the global economy," said George Worthington of IFR.

Domestic consumption accounts for nearly 60% of Indonesia’s economy.

And notice that the story in Indonesia is about domestic consumption as opposed to export demand. Indonesia has a much larger share of aggregate demand that comes from domestic sources than does China, Vietnam or Thailand where more than 60% of demand comes from exports. Bottom line: EM is about a lot more than the BRIC countries. Indonesia is an economy to watch.