The Malaysian Reserve

Hold off on buying Indonesia stocks, strategists say

By BLOOMBERG

JAKARTA • Indonesia’s key stock index may be down 14% from its February peak, but it still isn’t time to get back into equities in South-East Asia’s biggest economy.

That’s the message from Morgan Stanley analysts Sean Gardiner and Aarti Shah and Aberdeen Standard Investments investment director Bharat Joshi, who said the rupiah’s weakness may keep investors away as emerging-market (EM) turmoil deepens.

The danger is of continuing rupiah weakness “spilling over into corporate activity”, according to Gardiner, writing in a report dated Sept 5.

Unless policymakers build the impression of a credible approach toward stabilising the currency, which is down almost 9% this year and the worst performer in Asia after the rupee, foreign investors will stay away, Aberdeen’s Joshi said.

The Jakarta Composite Index fell 3.8% on Wednesday as investors girded for the potential of further interest-rate hikes to put a floor under the nation’s currency, which has hit its weakest against the dollar since 1998.

Foreign investors have pulled out US$3.7 billion (RM15.36 billion) from the equities market this year, set for the biggest annual outflow from Indonesia ever. The benchmark index closed 1.6% higher yesterday, the steepest daily gain since Aug 20.

Other headwinds for corporate profitability include the introduction of import tariffs and postponement of infrastructure works.

“All this while earnings are already running below trend this year,” Morgan Stanley’s Gardiner said.

Indonesian asset classes may remain under pressure if the sell-off in EMs continue, said Goldman’s Nupur Gupta in a Sept 5 report. He expects Indonesian policymakers to remain proactive if the pressure on the rupiah continues.

And the equity sell-off hasn’t made stocks cheap enough to draw bargain hunters. The valuation on the MSCI Indonesia gauge isn’t “overly compelling” at a 16% premium compared to Asia ex-Japan stocks, according to Gardiner.

“Investors will only buy into companies that are attractive with sustainable growth. Unfortunately, we are coming out of a period where the valuations are not attractive because the growth is actually subpar,” Joshi said in a phone interview. Not all strategists are bearish.

Amica Darmawan, a fund manager at PT First State Investments Indonesia, said the government has become more proactive and creative in handling the current situation which should be enough to shore up confidence in the currency.

“Indonesia should be attractive to foreign investors to start buying the shares especially for those investors who have left the country in the early stage of the outflow,” she said.

Even for Gardiner, there are still some pockets of opportunity. He likes telecommunication stocks given the return of pricing power after a ninemonth price war.

“I’m always an optimist. Indonesia still has very strong fundamentals, it’s just the headwinds and the currencies that are going to leave some damage in the short term,” Joshi said.