As a member of the so-called Fragile Five, Indonesia endured a torrid 2013.
US taper fears, a plummeting currency, rising inflation and falling commodity demand combined with a widening current account deficit to create the perfect storm for the country and investors deserted it in their droves.
With the Indonesian central bank hiking rates dramatically last November and a 10% jump in exports in December, some investors are reassessing the undoubted potential of this Southeast Asian powerhouse and predicting better fortunes for the beleaguered currency, equity and bond markets in the year ahead.
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Pulling out all the stops
Citywire A-rated Iain Stealey, head of global aggregate at JP Morgan Asset Management, sees Indonesia as one of the most attractive bond markets in Asia after the recent sell-off and is starting to eye bargains in the EM corporates market.
‘You need to look at the EM countries that have been more proactive in implementing reforms and [along with Brazil and India] the Indonesian central bank has been very proactive in raising rates,’ he said.
Safe to revisit
Matt Linsey, manager of the GAM Star North of South EM Equity fund, believes the Indonesian currency has now stabilised. He is starting to buy back into the market, having taken his weighting from nothing to 1.5% of the fund in the past few weeks.
‘The current account has come down and the trade deficit is improving. Inflation and interest rates are at about 8% which looks better than it did. Although the country remains quite dependent on commodity demand, it has so much potential and it is a market EM investors cannot afford to ignore,’ he said.
Citywire A-rated Vincent Lagger, who runs the JB Asia Focus fund, points out that while a third of the country’s workforce is in the commodities sector, 60% of Indonesia’s economy is related to the domestic consumption story.
He also thinks the country suffered adversely from being tagged with comparatively poorer Fragile Five nations such as Turkey and South Africa.
‘The country did brilliantly after 2006/7 but it did not use that opportunity to fix the economy. The currency took a beating over the last 18 months as the current account went to a deficit but today this has stabilised and rates have been hiked to slow inflation.
We like cement firm Indo Cement but will look over the next 6-12 months before adding more as we would like more clarity from companies on how their business is doing. The elections in May could be crucial.’
Waiting on election
Like Lagger, Mark Evans, an EM fixed income analyst at Investec, is looking to the May presidential election as a decider in whether to increase exposure once again to Indonesian bonds.
‘If there is sustained improvement in the trade balance and therefore an improvement in the current account, we should see a return of confidence in the rupiah, especially if onshore liquidity normalises. The result of the presidential election later this year should be a big determinant on the performance of Indonesian assets.
This article originally appeared in the March issue of Citywire Global magazine