Indonesia's recent troubles and potential political risk will not deter some managers from continuing to pour money into the country or the region.
Recently, Asian markets have been rising, after bottoming out a year ago. And money managers, while cautious about Indonesia, say they are still bullish on the region.
Asian markets outperformed Europe in August, according to Morgan Stanley Capital International. The MSCI Emerging Markets Free Asia index rose 4.2% for August, while the Euro index rose 2.2%.
For the year through Sept. 14, the EMF Asia index was up 55.3%, while the Euro index was down 2.2%.
But investors are mixed on the outlook for Indonesia. Violence in East Timor escalated earlier this month, after an Aug. 30 referendum favored independence from Indonesia.
After much debate, the United Nations was poised to send in peace keeping troops to East Timor at the end of last week.
Money managers said one key to Indonesia's prospects was November's presidential election running smoothly.
But some investors are looking to Indonesia for value stocks. INVESCO Global Asset Management, with about $250 million in U.S. institutional assets in Indonesia and nearby Malaysia, could increase its current holdings in Indonesia if stock prices slip because of the recent crisis.
"We probably would not be surprised to see some short-term weakness," said Erik Granade, a portfolio manager with INVESCO in Atlanta. The company is bullish on Indonesia's long-term prospects because the firm has "slightly higher expectations for global economic recovery" than does Wall Street.
INVESCO has a combined weighting in Indonesia and Malaysia of about 6% in portfolios it runs for its pension fund and institutional clients. The benchmark, the MSCI All-country Asia Pacific Free ex-Japan index, had no exposure to Malaysia and 2% in Indonesia.
"We're a bit more optimistic about Indonesia than our competition," Mr. Granade said. He added the firm was overweight in cyclical stocks such as producers of commodities, steel and petrochemical companies and semiconductors.
Other money managers, while not adding to their positions, said their portfolios hold small stakes in Indonesian companies producing consumer goods, such as PT Indofood Sukses Makmur, one of the world's largest producers of noodles, and Indah Kiat Pulp & Paper Corp. PT, a major producer of pulp and paper products.
Other fund managers don't want any exposure to Indonesia. SG Asset Management, Singapore, sold its Indonesian positions last year. "There's no compelling reason to be in (Indonesia)," said Marco Wong, chief investment officer. He added that the violence in East Timor, on top of a recent major banking scandal, could lead the World Bank and the International Monetary Fund to withhold some loans.
Investors have "so many choices after the Asia crisis" of the past couple of years, Mr. Wong said. Indonesia's "risk characteristic is far higher than other markets."
American Express Asset Management Ltd. sold all of its holdings in Indonesia after the parliamentary elections in May, said Elizabeth Tran, chief investment director, Pacific Basin, in Hong Kong. She had been slightly underweighting the region before the elections.
"Yes, many fund managers are sanguine about the impact of Timor because the territory is small and not an important contributor to the economy," she said. "They expect IMF funding to resume soon, but we are more worried about this."
But other Asian markets are expected to fare better, and some money managers are bullish on South Korea and Taiwan. In Taiwan, companies producing semiconductors, computer notebooks and personal computer parts are favored. Strong demand from the United States, along with a strong yen, can only help this sector, they argue.
"Taiwan's electronic sector is globally competitive," said Bob Hrabchak, a vice president and international equity portfolio manager with Credit Suisse Asset Management in New York. His portfolios include Taiwan Semiconductor Manufacturing Co. and Hon Hai Precision Co., he said.
South Korea is the largest Asian country weighting in State Street Global Advisors' active emerging-markets portfolios, said Brad Aham, a portfolio manager for the Boston-based giant. The country has a weighting of between 16% and 17% vs. the International Finance Corp. and MSCI weightings of close to 14%. Samsung Electronics is the largest single holding in SSgA's emerging markets portfolio, at 3.5%.
And there are other significant developments in the area for fund managers. Malaysia, which lifted most capital controls at the beginning of September, will again be included in leading emerging markets indexes -- the IFC's in November and MSCI's in February.
Also, MSCI recently decided to boost the market capitalization weighting of Taiwan to 100% from 50% in its emerging markets free indexes.
Such changes could lead to bouts of buying by managers as they rebalance clients' portfolios.
"It's forcing global investors to sit up and take notice," said Mr. Hrabchak.
