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Investing Opportunities in the Indian Ocean Rim

Investors have been paying precious little attention to a broad swathe of the globe in recent years. The 30-plus countries of the Indian Ocean Rim were home to over a third of the world’s population in 2010, but only 10% of world GDP by purchasing power parity. Along with this human potential, many of them boast valuable natural resources and prime strategic and commercial positioning.

The Pacific Rim has been receiving the lion’s share of the world’s attention due to China’s economic success. But there is plenty of potential in the Indian Ocean Rim, particularly in India, Indonesia, and the East African region.

India

When Narendra Modi was elected India’s prime minister by a landslide in May 2014, investors around the globe cheered the decision. As chief minister of the northwestern state of Gujarat from 2001 to 2014, he established a reputation for himself as a business-friendly leader who could make good on his promises.

To cite one famous example, in 2008, Tata Motors Ltd. (TTM) gave up on building a plant in West Bengal after political squabbling had stalled the project. Modi invited the company to Gujarat, taking three days to make the arrangements that West Bengal’s leaders had not been able to in two years. The story inspired Ford Motor Co. (F) and others to join Tata in the state. Gujarat’s per capita income tripled during Modi’s tenure, but inter-religious violence—and his perceived complicity in it—marred his legacy.

As prime minister, he has not been able to take the same quick, decisive action he became famous for in Gujarat. Turning his continent-sized country around was never going to be easy, but critics say that Modi has spent more time hobnobbing with the world’s political and business elite than carrying out his laundry list of promised reforms. A national goods and services tax bill and a bankruptcy reform bill have stalled in parliament, and looming elections threaten to keep them there.

Taj Mahal, India. iStock Photo

Taj Mahal, India. iStock Photo

Even if he can deliver on them, Modi’s promises suffer from blind spots. There is little in his agenda to address pollution, privatization of state-owned enterprises, the toxic labor code, or education. Modi also seems unable to curb his party’s Hindu chauvinism. The upshot is that India still languishes near the bottom of the World Bank’s Ease of Doing Business rankings, at 142 out of 189 (Modi’s goal is to rise to the top 50 next year).

And yet the IMF estimates 7.3% Indian GDP growth for the year ending March 31, versus 6.8% for China. Indian companies that trade on U.S. exchanges include HDFC Bank Ltd. (HBD), ICICI Bank Ltd. (IBN), Tata Motors and WNS (Holdings) Ltd. (WNS), based in Mumbai; Wipro Ltd. (WIT) and Infosys Ltd. (INFY), based in Bangalore; and Dr. Reddy’s Laboratories Ltd. (RDY), based in Hyderabad.

ETF investors have a few choices to get exposure to India. EGShares India Infrastructure ETF (INXX), EGShares India Consumer ETF (INCO) and Market Vectors India Small-Cap ETF (SCIF) all offer variations on the generalized iShares MSCI India ETF (INDA).

Indonesia

Indonesia.

Indonesia.

Indonesia’s president, Joko “Jokowi” Widodo, is cast in a similar mold to Prime Minister Modi. He is a charismatic, pro-business reformer who has caught the world’s attention. And as with his Indian counterpart, his actual accomplishments are debatable.

Jokowi caused a stir when he took office in October 2014 and ditched wasteful fuel subsidies, citing the need to free up funds for infrastructure projects—except that he did not actually introduce free-floating fuel prices, and has not revised prices up to market levels.

Perhaps pressure from businesses and consumers was too great, given the rupiah’s precipitous slide against the dollar since 2012. The weakening of Indonesia’s currency was primarily caused by falling commodity prices, which have also hurt growth. GDP grew 4.7% in 2015, well below the 5.7% government target. The country is heavily dependent on coal, oil and palm oil. To reduce this dependence, Jokowi has announced reforms aimed at boosting manufacturing, including cutting Indonesia’s impressive red tape.

While these are steps in the right direction. many critics feel that Jokowi is not doing enough to strip away Indonesia’s protectionism. Tariffs are mostly low, but non-tariff trade barriers such as local-content requirements (which shut out smartphone-makers, for example) are rife. On the other hand, in an October visit to the White House, Jokowi announced Indonesia’s intent to join the Trans-Pacific Partnership (Modi has expressed similar interest), perhaps signaling a less protectionist approach.

U.S. investors wishing to gain exposure to Indonesia have a few options. The iShares MSCI Indonesia ETF (EIDO) is the most heavily traded Indonesia-focused ETF, followed by the Market Vectors Indonesia ETF (IDX). There is also a—very thinly traded—small-cap ETF available, the Market Vectors Indonesia Small Cap ETF (IDXJ). The majority state-owned telecom, PT Telekomunikasi Indonesia Tbk (TLK), is listed on the NYSE.

East Africa

View of Mt. Kilimanjaro from Ambosela, Kenya.

View of Mt. Kilimanjaro from Ambosela, Kenya.

Leaving aside fractured Mozambique and the failed state of Somalia; Tanzania and Kenya are the East African countries with Indian Ocean coastlines. Increased regional integration, however, could soon tie Burundi, South Sudan, DR Congo and Ethiopia in with the rest of the Indian Ocean Rim.

A number of new rail lines and improvements to existing ones have been proposed, beginning with one linking Nairobi and Mombasa. This line, 90% funded by the Chinese Exim Bank, is slated to be finished in 2018. Critics have expressed concern that the rail network could be a white elephant in the mold of an infamous Ugandan highway that is now used to dry cassava.

Yet there is reason to hold out hope for East Africa. Some of its economies have sustained impressive growth in recent years, and it is reasonable to think that improved transport links would not go to waste. Rwanda’s GDP has grown consistently at a rate of around 8% for a decade. Its healthcare and education systems are good, it is relatively free of corruption, and it ranks 46th—above Puerto Rico—on the Ease of Doing Business index.

Kenya also boasts some successes. Its mobile penetration is quickly catching up with that of the developed world, and it has led the way globally in mobile payments. Safaricom Ltd.’s M-PESA, a kind of mobile cash, is wildly popular, with 29 million users (out of 48 million Kenyans) performing 103 million transactions in October 2015. Other countries have adopted the technology to boost financial inclusion, including Romania, Egypt and India.

Yet there are nagging political problems and deep social divisions in the region, which could hamper growth. Kenya’s president, Uhuru Kenyatta, was indicted by the International Criminal Court for post-election violence that killed 1,200 in 2007-2008 (the charges were dropped in 2014).

Paul Kagame, Rwanda’s president since 2000, is trying to abolish constitutional term limits, and similar moves threaten stability in many African nations, including neighboring Burundi. Violence is already escalating over president Pierre Nkurunziza’s refusal to step down, and some reports indicate that the conflict is taking on an ethnic dimension. Hutu-Tutsi violence has flared up a number of times in the region, most seriously in the 1994 Rwandan genocide.

More encouragingly, John Magufuli, Tanzania’s president since November, is leading a popular anti-corruption campaign—although his zeal for thrift has earned him some light ribbing on social media.

There are few good ways for retail investors to get exposure to East Africa. The Guggenheim Frontier Markets ETF (FRN) has around 10% exposure to Kenyan companies, and holdings include Safaricom and East African Breweries Ltd. The iShares MSCI Frontier 100 Fund has around 6% exposure to Kenya, while the Market Vectors Africa Index ETF (AFK) has around 4%. Diageo plc (DEO) has operations in Kenya, Tanzania, Uganda, Burundi, Rwanda and South Sudan, which together contribute between 3% and 6% of total sales.

Cooperation

The growth prospects of Indian Ocean Rim countries would certainly be improved by more regional cooperation, but unfortunately there are few signs of that so far. A preliminary map of China’s “21st-Century Maritime Silk Road” shows the linkages among the Indian Ocean’s cities, the Pacific and the Mediterranean, so it is possible that China’s initiative will help strengthen ties in the region. Modi has racked up the miles urging closer cooperation between Indian Ocean Rim countries, as well as many others.

But the main regional body, the Indian Ocean Rim Association (IORA), is little more than an acronym. Despite almost two decades of existence, few have heard of it, and it has accomplished little to nothing. Australia’s foreign minister released a statement in October, when the country handed over leadership of the organization to Indonesia. She said she was “confident that Indonesia will lift IORA to new heights.” We can only hope she’s right.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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