Friday, August 21, 2009

Indonesia’s year of living safely

View the original source: FT Alphaville, 20 August 2009

Even in Asian investment circles, it can come as a surprise to learn that the world’s second-best performing stock market this year has been Indonesia’s.

Bloomberg did its bit on Thursday to publicise the fact, reporting that Indonesia’s stock index may return to the record reached last year in the next 12 months, led by automotive, banks and property stocks as falling interest rates boost growth.

That prognosis, offered by Batavia Prosperindo Aset Manajemen, one of Indonesia’s best performing funds over the past five years, follows a boom-bust-boom cycle for the Jakarta Composite Index, which hit a record high of 2,830.26 in January last year before plunging 61 per cent to its October low. Since then, the index has surged 68 per cent this year.

As Bloomberg notes:

Shares are rebounding as Indonesia posted the fastest growth among Southeast Asian nations even as the global economy remained in recession. President Susilo Bambang Yudhoyono’s re-election last month raised expectations the government will maintain policies that helped the economy to expand 4 per cent in the second quarter and curb inflation to a nine-year low.

Optimism over Yudhoyono’s economic policies after his re-election overshadowed terrorist attacks last month. The measure surged 15 per cent in July, the sixth-best among 89 indexes worldwide tracked by Bloomberg, even after the bomb blasts at the JW Marriott and Ritz-Carlton hotels in the capital city of Jakarta killed nine people.

Now, however, some investors and analysts are predicting a “healthy correction” after recent gains began outpacing earnings potential. Some predict the Jakarta Composite may fall as much as 10 per cent in the next month - and indeed, notes Bloomberg, the index slipped 2.5 per cent to 2,277.75 on Wednesday.

In Batavia’s view, investors should focus on falling interest rates after Indonesia’s central bank reduced its key rate nine times from December to the current level of 6.50 per cent after inflation eased to a nine-year low last month. As CLSA’s Christopher Wood notes in his most recent Greed & Fear client newsletter:

Indonesia is now the best performing market in Asia year to date reflecting its classic high beta nature and the sensitivity of the local interest rate cycle to rupiah appreciation. Thus, the MSCI Indonesia index has risen by 92% in US dollar terms so far this year, compared with a 47% gain in the MSCI AC Asia ex-Japan index (see Figure 10), as inflation has slowed to 2.7% YoY in July.

A further positive factor in recent months has been the explosion in internet trading by local investors, according to Wood. Consider, he says, citing a recent CLSA report, the combined share of total trading volumes for the three internet-based brokers in Indonesia is already approaching 10 per cent, up from only 1.8 per cent for last year.

Still, warns Wood, investors should wait to see the formation of the new Yudhoyono Cabinet before taking a view on the country’s medium-term potential:

This is because the selection of the cabinet will give a clue as to whether the country is really going to deliver on an infrastructure investment cycle. Remember that the progress in this area during Susilo Bambang Yudhoyono’s first five-year term was bordering on the pathetic. In this respect it will be important to see whether the cabinet is filled with competent technocrats or financially endowed cronies. Unfortunately, it will take time for investors to find this out since the cabinet is not due to be announced until October!

Staying on the Indonesia theme, Wood takes issue with a comment from one Asia-based investor last week who claimed that Indonesia was a far better long-term story than Brazil. “This is, unfortunately, complete nonsense”, he says, continuing:

The quality of both governance and the legal system is dramatically superior in Brazil to Indonesia. Foreign direct investors in Brazil also do not face the threat of Islamic suicide bombers. It is also the case that Brazil is a more diversified story than Indonesia in the sense that the latter is more directly geared to China and India for the reasons stated in CLSA’s recent Chindonesia report [July 10 2009].

For those reasons, says Wood, global equity investors who want to concentrate their portfolios in three liquid, and diversified, emerging markets should concentrate on China, India and Brazil - at least for now.

Lex, taking up the theme in a note last week, wryly notes that ever since Goldman Sachs economist Jim O’Neill caught investors’ imagination with the Brics (Brazil, Russia, India and China), brokerages’ research departments “have spent almost as long on wordplay as on heavy macro analysis”.

CLSA, it notes, “has big hopes for its new coinage, Chindonesia. The brokerage has been energetically touting ‘Asia’s next growth triangle’: to the China/India axis, add Indonesia.”

If strong growth is the main consideration, it continues, “then south-east Asia’s biggest economy has earned its inclusion”: annual GDP growth of 4 per cent in the second quarter is the best in the region. But like CLSA’s Wood, Lex has reservations:

Currency stability — high on the wish list for any serious investor — remains elusive. The rupiah plunged by a quarter and then gained a quarter in the past 12 months. President Susilo Bambang Yudhoyono, re-elected last month, needs to get a grip on the twin problems of bureaucracy — power is concentrated at the district level across 6,000 inhabited islands — and graft. Last year, the Corruption Eradication Commission investigated fewer than 1 per cent of the complaints it received.

And that is why the money, for now, is mostly heading elsewhere, concludes Lex:
Indonesia received $8.3bn of foreign direct investment last year — about a 10th of China’s total and a quarter of India’s. More net foreign money, in absolute terms, has gone into Bangkok’s stock market this year than Jakarta, though Thailand is 17 places below Indonesia on the list of the world’s best-performing exchanges. The Brics were an instant hit; Chindonesia needs time.


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