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Indonesia Stocks Are Red Hot as Valuations Surge

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James Bladen
James Bladen joined Alpha Southeast Asia in 2015. He has written on a wide range of issues covering capital markets, Islamic finance and M&A. He worked as a consultant in Indonesia (2013-2017) and moved to New York in 2020 where he continues to cover Southeast Asia.

After a tumultuous 2015, Indonesia’s financial markets are turning red hot. Stock valuations have climbed to records after the benchmark equity gauge rebounded 16 percent from its September low. Foreign investors have pumped $181 million into the nation’s shares this year, the only net inflows recorded among eight Asian markets, helping the currency to trade near a seven-month high. That’s a turnaround from last year, when the Jakarta index tumbled into a bear market and the currency sank to a 17-year low as rising U.S. interest rates and an emerging-market selloff spurred $1.6 billion of outflows.

While Mark Mobius says investor bullishness is overdone given a poor outlook for earnings and questions over the government’s ability to push through infrastructure spending, Baring Asset Management Ltd is betting equity gains will be sustained as economic growth accelerates and falling inflation gives the central bank room to cut borrowing costs.

“Sentiment on Indonesia has shifted to positive because investors are seeing some improvement on the ground in terms of the economic recovery,” said Soo Hai Lim, a Hong Kong-based money manager at Baring Asset Management, which oversees about $41 billion. Lim has been increasing investments in Indonesia’s consumer, finance and telecom stocks since October.

Stock Valuations

The Jakarta Composite Index has gained 4 percent this year to be Asia’s best performer, with MSCI Inc.’s regional gauge tumbling 8.9 percent in the same period. The Indonesian measure trades at 26 times reported earnings, more than twice the level of the MSCI Asia Pacific Index and near the biggest premium since at least 2002. The Jakarta index rose 0.3 percent on Thursday, its fourth straight day of gains.

The economy, Southeast Asia’s largest, expanded at a faster-than-expected 5.04 percent in the three months to December, picking up from its slowest pace in almost six years in the second quarter. The monetary authority lowered its policy rate by 25 basis points to 7 percent on Thursday, following a reduction last month, as predicted by 17 out of 28 analysts surveyed by Bloomberg. The chances of President Joko Widodo carrying out much-needed spending plans increased after he gained support from some opposition parties.

Mobius, who says he isn’t buying or selling Indonesia stocks, wants to see evidence that the president’s ambitious plans are succeeding. Widodo, known as Jokowi, has pledged to implement business-friendly reforms, increase spending on railways and ports, and to transform an often corrupt and inefficient bureaucracy. Parliament last year passed just three bills into law, the lowest total in at least the last five years, according to the Jakarta Post.

Earnings Prospects

“Local and foreign investors will only put more money into Indonesia unless reforms are implemented,’’ said Mobius, the Franklin Resources Inc. money manager who’s been investing in emerging markets for more than four decades. “There are currently no tailwinds that can help the outlook for stocks since the earnings prospects are not good.”

Last week, the government said it will allow full foreign ownership of some businesses including toll roads, while maintaining existing limits on sectors such as banking. The government has allocated almost 300 trillion rupiah ($22 billion) from its 2016 budget for infrastructure spending.

Jeffrosenberg Tan, a fund manager at PT Sinarmas Asset Management, one of Indonesia’s top performing funds, sees the nation’s equities as sheltered from a slowing Chinese economy.

China Decoupling

“Investors have started to observe a possible decoupling between the Indonesian economy and the problems in China,” said Jakarta-based Tan, whose Simas Satu fund has beaten 93 percent of peers over the past five years with an overall return of 9.8 percent, according to data compiled by Bloomberg. He’s buying builders such as PT Adhi Karya and consumer stocks on prospects of a recovery in domestic spending and construction orders.

Gains this year have been led by consumer, agricultural and financial companies. Animal-feed producer PT Charoen Pokphand Indonesia has surged 40 percent, PT Bank Danamon Indonesia has jumped to its highest level since August, while PT Astra International is up for a fifth straight month.

Increasing stability in Indonesian assets relative to global markets is luring Ben Surtees, London-based money manager at Jupiter Asset Management Ltd., which oversees about $51 billion, to increase holdings of the nation’s stocks. His investments include Ace Hardware Indonesia, a hardware store operator.

A gauge of 30-day price swings on the Jakarta Composite fell this month to the lowest since August, while volatility on Japan’s Topix index reached the highest since the global financial crisis. The rupiah has gained 2 percent this year, the second-best performer among Asian currencies after the ringgit, while the nation’s trade balance has been improving.

“Indonesia has performed strongly this year because the currency has stabilized and inflation has continued to fall along with the current account deficit,” said Surtees. “We’re seeing more contracts being awarded and signed and the projects getting underway. There’s more comfort in that part of the economy.”

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