BRICs Losing to Turkey as Indonesia Swaps Beat Russia (bloomberg.com)

Aug. 9 (Bloomberg) -- Indonesia and Turkey are beating the world’s biggest emerging markets by almost any financial measure, even while they may be too small to join the BRICs.

Indonesia’s equity index climbed 21 percent this year and Turkey’s rose 13 percent, both hitting all-time highs on July 29. Credit-market rallies sent yields on the nations’ foreign- currency debt to the lowest levels on record, JPMorgan Chase & Co.’s EMBI Global gauges show. The MSCI BRIC Index of shares in Brazil, Russia, India and China is still 42 percent below its peak after losing 1.2 percent in 2010.

Less than two years after the global financial crisis prompted concern Indonesia and Turkey may default, investors are betting lower debt, growing populations and rising profit will spur economic expansions that led Goldman Sachs Group Inc.’s Jim O’Neill to promote the BRIC nations in 2001. While China’s gross domestic product is about 4.2 times Turkey and Indonesia’s combined, they lead the “Next 11” smaller emerging nations with the most potential to affect world growth, O’Neill says.

“There’s a paradigm shift in the way both countries have been governed and in terms of economic performance,” Amer Bisat, the former senior economist at the International Monetary Fund who helps oversee more than $1 billion as a money manager at hedge-fund firm Traxis Partners LLC in New York. They’re “large, extremely systemically important and stable,” he said. “The market is looking at them in a very different light.”

Biggest Bets

The largest emerging-market stock mutual fund managers, which oversee about $250 billion, boosted their holdings in Indonesia and Turkey to the top “overweight” positions among 21 markets in June on expectations the gains will continue, data compiled by Cambridge, Massachusetts-based EPFR Global and JPMorgan of New York show.

The fund managers are turning optimistic as profit growth outpaces share prices in both countries, leaving the Jakarta Composite Index and ISE National 100 Index trading at price- earnings ratios about 20 percent below their pre-crisis peaks, according to data compiled by Bloomberg.

Mark Mobius, who oversees about $34 billion as the Singapore-based chairman of Templeton Asset Management Ltd., said last month by e-mail that he plans to increase holdings of stocks in Turkey, where the firm already has more than $1 billion invested. In June, he wrote on his blog that Templeton has a “positive take on investment opportunities” in Indonesia, while Antoine van Agtmael, chairman and chief investment officer of Emerging Markets Management LLC in Arlington, Virginia, said on Bloomberg Television that the country is the most attractive among Southeast Asian markets.

Relative Valuations

The bullish bets are a turnaround from 2008, when investors shunned Indonesia and Turkey as the global economy fell into the worst recession since World War II. The Jakarta Composite and ISE National both sank more than 50 percent, the nations’ currencies weakened at least 15 percent versus the dollar and credit-default swap prices suggested a 66 percent chance of default for Indonesia and 52 percent odds for Turkey, data compiled by Bloomberg show.

Indonesian stocks are becoming more expensive relative to other developing markets. The Jakarta gauge trades at 13.5 times analysts’ estimates for earnings over the next 12 months, near the highest on record relative to the MSCI Emerging Markets Index, which is valued at 11.2 times, according to data compiled by Bloomberg since 2006. The MSCI BRIC gauge has a ratio of 11.

Political Risk

Turkey is unattractive for investors because political risks are rising, according to Uri Landesman, president of New York-based Platinum Management LLC.

The government voted in the United Nations Security Council against imposing new nuclear sanctions on Iran in June, and Prime Minister Recep Tayyip Erdogan recalled the nation’s ambassador to Israel. Turkey invited leaders of Hamas, a group branded as terrorist by the U.S., for talks in Ankara. Turkey and Indonesia have predominantly Islamic populations and elected governments.

For Turkey, “if they continue on their current course, politically and culturally, I see them moving away from capitalism towards being the kind of nation that’s very unattractive to invest in,” said Landesman.

Turkey is committed to maintaining a secular state and the government’s “improvement in relations” with neighbors such as Iran “does not affect our stance with regard to Europe,” Murat Mercan, chief of the Turkish parliament’s foreign relations committee, said in an Aug. 4 interview.

‘Good Momentum’

Turkish stock valuations factor in the nation’s political risks, while Indonesian companies have shown they can surpass analysts’ earnings projections, according to Martial Godet, who helps oversee more than $60 billion as the Paris-based head of emerging markets investments at BNP Paribas Investment Partners.

The ISE National index is valued at 9.6 times analysts’ profit forecasts for the next 12 months, a 14 percent discount to the MSCI emerging index, according to data compiled by Bloomberg. Companies in Indonesia’s Jakarta Composite gauge beat analysts’ profit projections during the past five quarters, data compiled by Bloomberg show.

“The momentum is good for both markets,” said Godet. “They are not mainstream investments so people will continue to add money. In both cases we have populated countries that are growing very well.”...

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