Mounting inflation and weakening economic growth is generally dimming the outlook for Indonesian stocks, but an expanding consumer sector remains a bright spot for investors in the long term.
"[With] Indonesia we are a bit cautious over the short term because of inflation," Catherine Yeung, investment director at Fidelity Worldwide Investment, told CNBC. She said that wages are growing in the country, and that the market is expensive compared to some others in the region.
Inflation spiked in March to 5.9 percent—the highest in almost two years. And in the first quarter, the economy expanded 6.02 percent—below analysts' expectations and down from 6.11 percent in the last quarter of 2012.
Economic headwinds have weighed on equity market performance. The Indonesia MSCI Index, ticked only 1.5 percent higher during last three months, after gaining 14.2 percent over the past year. Its neighbors saw larger gains—the MSCI Philippines rose 42.7 percent and MSCI Thailand index jumped 19.3 percent over the past 12 months.
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"Long term the region has a lot of opportunities. For example, they are in the middle of constructing AEC, ASEAN Economic Community, the aim is to create a single integrated market by 2015. This really means the removal of trade barriers, as well as massive infrastructure projects," Yeung said.
Analysts believe the consumer sector is where Indonesia may see some gains. Indeed, consumer stocks there have already started seeing gains this past year.
"Where you want to be is domestic demand and the emerging market story is fundamentally a story of rising domestic prosperity," Richard Titherington, CIO of emerging markets equity at J.P. Morgan Asset Management, told CNBC.
The consumer sector has been on a rise in all South East Asia, and Indonesia has outpaced many of its neighbors. The middle class in Indonesia is forecast to grow by 90 million people by 2030—more than any emerging economy save India and China, according to a McKinsey Quarterly report. That should translate into $1 trillion in annual spending on consumer goods.
Indonesian consumer spending constitutes around 60 percent of gross domestic product and is closer to the level of developed countries than export-driven neighbors like Malaysia and Thailand, according to McKinsey.
And people in the archipelago like big brands. Sixty percent prefer local brands especially in food and beverage category, but multinationals are not at a disadvantage because consumers are not always aware of brand ownership. For example Nestlé's Kit Kat is perceived as local by many Indonesians, McKinsey said.
The rippling effect of consumer expansion will drive growth in a range of industries. Between now and 2030 financial services will expand at 10.5 percent annually, the leisure sector will grow at 7.5 percent, while food and beverages as well as apparel will grow at about 5 percent, McKinsey forecasted.
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Shares of retailers and food producers are already seeing strong gains as investors bet on the future of the Indonesian middle class. Mitra Adiperkasa, Indonesia's biggest retailer, reported a 29 percent jump in revenues for the first quarter of 2013. The retailer targets middle and upper class consumers with its portfolio of over 100 international brands including Zara and Starbucks. And smaller department store operator Matahari Putra Prima has seen its shares double in the past 12 months.
In the food sector, shares of Indofood, which makes instant noodles, have surged 50 percent over the past year, while Ultrajaya, a producer of milk and health drinks, also saw a surge in market value.
Multinationals like Unilever and Nestle are also benefiting from the growing Indonesian middle class. A part of the international conglomerate, Unilever Indonesia's shares gained almost 30 percent in the past year.
After this stellar performance, however, Indonesian consumer growth no longer comes cheap.
"Short term it is very expensive [ASEAN market], but again medium to long term--lots of very attractive opportunities," Fidelity's Yeung said.