Where Big Is Beautiful; Investors used to favor small, flexible Asian markets. But their tastes are shifting to the major blockbusters including, possibly, Indonesia.

Byline: Ruchir Sharma (Sharma is a co-head of global emerging markets at Morgan Stanley Investment Management)

It's a scene familiar to moviegoers: as fires burn, bombs explode and shrapnel flies, the ash-smeared hero marches on, undaunted and unafraid. Much like Indonesia's stock market. In the face of leadership upheavals, civil rebellions and financial turmoil that would rattle its neighbors, the Jakarta Stock Exchange has stood out as one of the

hottest in all of Asia. Behind that surprising performance lies a major shift in the way foreign investors watch emerging markets.

For most of the past two decades, investors have favored plotlines involving small, flexible countries, often with a technological flair: Thailand, Malaysia, Taiwan. Now smaller countries have been left behind as tastes shift to the major blockbusters. In Asia, that means China, India and now, possibly, Indonesia. These are big, sprawling acts, with large workforces that multinationals can tap, and vast domestic consumer markets. Furthermore, a wealth of natural resources--once viewed as a kind of curse, a source of easy money that sapped a nation's will to produce and excel--is now seen as a competitive advantage, benefiting countries from Brazil to Russia. Indonesia is the only Asian economy that is blessed in both respects: the world's fourth most populous nation, with 240 million people, it also has vast untapped oil reserves, coal, palm oil and nickel.

And so our hero rises amid the chaos. Since the Bali bombings of October 2002, the Indonesia market has risen 400 percent, and it now trades at a premium to fellow members of the Association of Southeast Asian Nations like Malaysia or Thailand, despite the fact that its economy is growing no faster and more precariously. In recent years GNP growth has averaged 4.5 percent, following the new trend line for the region's once high-flying economies, brought to earth by the Asian financial crisis of 1997-98. Meanwhile, Indonesia's inflation and balance of payments have often looked shaky, triggering a mini-collapse of the rupiah a few months ago.

The market continues to climb in part because of the "base effect." It's always easy to grow from a small base, and Indonesia's market is still recovering from a more than 90 percent plunge in dollar terms during the crisis years. Now that it has surpassed its smaller neighbors, however, the conclusion seems clear: investors are just more bullish on big countries in Asia. ...