Indonesia rebounds as stocks soar and valuations reach record heights

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 per cent from its September low. Foreign investors have pumped $180-million (U.S.) into the country’s shares this year through Feb. 16, 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 sell-off spurred $1.6-billion of outflows.

While emerging-markets money manager 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,” Soo Hai Lim, a Hong Kong-based money manager at Baring Asset Management which oversees about $41-billion, said. Mr. Lim has been increasing investments in Indonesia’s consumer, finance and telecom stocks since October.

The Jakarta composite index has gained 3.8 per cent this year to be Asia’s best performer, with MSCI Inc.’s regional gauge tumbling 11 per cent 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 economy, Southeast Asia’s largest, expanded at a faster-than-expected 5 per cent in the three months to December, picking up from its slowest pace in almost six years in the second quarter. The monetary authority will lower its policy rate by 25 basis points to 7 per cent this week, following a reduction last month, according to 17 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.

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