Courtesy of The Financial Times, a look at Indonesia:

Those hoping to get away from it all in Indonesia usually think of Bali. But Jakarta’s financial markets are arguably as much of a haven for investors these days.

Investors are drawn to Indonesia by strong domestic consumption from an increasingly wealthy population of 240m – a shelter from wobbly global trade on which export-oriented Asian countries such as Korea and Taiwan are heavily reliant. Economists are predicting another quarter of over 6 per cent growth when statistics are released next week. But how much can one really hide in Jakarta?

“It is so large in terms of population – third in Asia and fourth in the world – and obviously consumption is rising, so that is why the market views this country as less affected [by global turmoil],” said Kelly Chung, a portfolio manager at ING who focuses on Indonesia.

The data support much of that view. Indonesia’s exports add up to a little more than 20 per cent of GDP, according to HSBC, compared with more than 60 per cent in Thailand and Vietnam. That means a fall in trade affects Indonesia less than nearly all of its peers (although India, with a similarly deep local market, is also less exposed to the ups and downs of trade flows).

The promise of growth in a country with just 67m people fewer than the US has kept Indonesia’s markets strong. Last year, the MSCI Indonesia index beat the regional MSCI index by 26 per cent and the debt market got a boost from Indonesia’s recent elevation to investment grade.

But as always, the picture’s more complicated when you get up close.

For starters, many of those domestic consumers earn their salaries in industries closely linked to commodities and are thus vulnerable to the volatility expected in those markets this year.

According to Nomura analysts, agriculture created up to 40 per cent of Indonesian employment in 2010, meaning rural income in particular is “largely dependent on commodity prices.”

They write:

For example, when commodity prices declined sharply in 2008-09, monthly car sales contracted by as much as 48% below the previous peak. Motorcycle sales dropped 40% from the peak over the same period. Car sales bounced back when CPO [crude palm oil] prices surged in mid 2009-10, in our view reflecting the concurrent bounce in rural incomes

In addition to palm oil, Indonesia is also a major exporter of coal and other commodities. Although mining creates relatively few jobs on the national scale, equipment makers and mining infrastructure companies need coal prices high enough to encourage mines to continue large capital expenditures.

“The global situation actual has a bit more importance for the Indonesian economy that people realise,” said Teddy Oetomo, head of Indonesia research for Credit Suisse.

And, of course, Indonesia’s protection from trade swings means that if world growth does pick up, its low exposure to global growth means equities wouldn’t get that much of a lift, analysts from Morgan Stanley argue. In that (optimistic) scenario, investors would be more likely to head towards trade-exposed stocks now priced at cheaper valuations than Indonesia’s relatively expensive market.