The fallout of the Indonesian election will not lead to a rally like the one seen after India's elections, Citywire AAA-rated manager Matt Linsey has said.
Linsey made the comments in the latest update for the GAM Star North of South Emerging Markets fund.
Commenting on the Indonesian Presidential election, which was ultimately won by Joko Widodo (Jokowi) following a closely-run vote, Linsey said investors should not run ahead of themselves.
‘With Jokowi’s victory many investors are now making comparisons to India. We would disagree,’ he said.
‘Firstly, Jokowi’s party did not perform well in the recent legislative assembly elections and as a result do not have a majority capable of enacting substantial reforms.’
‘The optimistic scenario would have some of the parties that supported Prabowo in the Presidential election, such as Golkar, switch their allegiance to Jokowi, giving him a working majority.’
‘While this is a possibility, there remains a fairly powerful group, backed by Prabowo, who are against any moves toward reform, particularly of the judiciary and the military.’
Linsey, who is not alone in warning against rampant optimism in the wake of the election outcome, said Jokowi will face the tough task of cutting fuel subsidies, while boosting infrastructure spending. This will lead to a strong move from Prabowo’s populist faction, he said.
Not moving like Modi
While there are some parallels with India, Linsey said there were several key differences. For example, he said Indian investors had been in the ‘wrong sectors’, i.e. those unlikely to benefit from reform, but this does not chime with Indonesia.
‘Fortunately, for Indonesia there are very few poorly run “state controlled” companies that need to be reformed. Of the approximately 150 companies where we have data, 60% already meet or exceed their cost of equity in terms of return on equity.’
‘Unfortunately for equity investors, these are already highly valued – the Indonesian market trades on over 17x current year’s earnings.’
‘This is a 45% premium to the broader MSCI Emerging Markets index, while earnings growth for both is expected to be around 12%. With domestic 10 year interest rates of 8%, the implied earnings yield of below 6% also does not appear attractive.’
Linsey did name Aneka Tambang, a mining company, as a potential beneficiary from the fallout of the election. He said the firm had suffered under previous government regimes which had come down hard on foreign miners, but a ban being lifted could help to recover substantial losses in revenue.
Preliminary discussions between Jokowi and miners have been targeted at resolving this impasse, Linsey said, which has already led to the first raw material exports taking place following the ban.
Indonesia currently makes up 1% of the North of South Emerging Markets fund, which he runs on mandate for GAM. The main focus is China and Hong Kong, which makes up 16.6% of net exposure, ahead of Korea (15.7%).
The GAM Star North of South EM Equity fund returned 27.5% over the three years to the end of June 2014. This compares to a rise of 10% by its Citywire benchmark, the MSCI EM (Emerging Markets) TR USD, over the same period.