(Isia) – Global investors are heading back to Indonesia and sending stocks, bonds and the currency soaring, in a sharp reversal of sentiment after months of turmoil as the economy shows signs of improvement.

Investors Head Back to Indonesian Assets

Recent Data Indicate Improving Fundamentals

ANJANI TRIVEDI

Feb. 14, 2014 8:17 a.m. ET

Global investors are heading back to Indonesia and sending stocks, bonds and the currency soaring, in a sharp reversal of sentiment after months of turmoil as the economy shows signs of improvement.

The rupiah gained 3.4% against the dollar on Friday, the biggest one-day gain in four months, according to data provider CQG. For the week, the rupiah advanced 5%, making it Asia’s top-performing currency this year.

The country’s stocks have jumped 5.5%, for the region’s second-best performance so far this year after Vietnam.

The sudden turnaround follows data in recent weeks showing the country’s wide trade balance improving, inflation falling and foreign-exchange reserves swelling. Those three elements topped investors’ lists of worries when Indonesia was slammed in a global selloff last summer, ranking among the world’s worst casualties.

“It went through a bumpy ride, but now it’s attractive,” said Cecilia Chan, chief investment officer for fixed income at HSBC HSBA.LN -0.03% Global Asset Management, which manages $419 billion. “Investors are looking for higher yield. You look around in Asia for yield—there’s Indonesia and India, and in Indonesia it’s easier for foreigners to get into the market.”

The yield on the benchmark 10-year government bond is at 8.710%, more than three times that on equivalent U.S. Treasurys and beaten in Asia only by the 8.850% offered in India. Ms. Chan’s funds have recently added to holdings of rupiah and U.S. dollar-denominated bonds. She said continued loose monetary policy by the world’s biggest central banks has also supported flows into bonds.

She isn’t alone. Foreign ownership of government bonds in Indonesia has risen 3% since the beginning of the year, according to data from Morgan StanleyMS -0.74% The continued strong buying by foreign investors suggests the yield is attractive enough for the government to meet its additional funding needs in 2014, analysts from the U.S. bank say.

The biggest worry about Indonesia last year was the combination of a plunging currency—the rupiah lost 21%—and a gaping current-account deficit, a broad measure of goods and services. If both were left unchecked, the country could have run out of cash to finance the gap and been forced to rely on foreign financing.

But interest-rate increases late last year helped attract capital inflows, which coupled with rising exports cut the country’s current-account deficit to 1.98% of gross domestic product last quarter, the central bank said Thursday, compared with 3.8% in the previous period. On Friday, Indonesia posted a balance-of-payments surplus of $4.4 billion, after three consecutive quarters of deficits.

Meanwhile, the central bank has been rebuilding its foreign-exchange reserves, adding $1.3 billion in January for a total of $100.7 billion. That figure sits below the 2011 peak and remains the lowest in emerging Asia, but the increase marks an improvement from last year, when the central bank spent $20 billion seeking to stem the slide of its currency.

“Bank Indonesia realized there was no point wasting reserves to defend the currency,” said Rahul Chadha, co-chief investment officer at Mirae Asset in Hong Kong, which manages $58 billion. “It made sense to let the currency depreciate, raise interest rates to slow down the economy.” Mr. Chadha’s funds are overweight on Indonesian equities.

To be sure, plenty of obstacles remain to be overcome, including parliamentary elections in April and a presidential election in July, creating uncertainty about postelection policies.

“We must wait until after the elections to see policy reform and implementation,” said Mark Mobius, executive chairman of the Templeton Emerging Markets EMF +0.49% Group, a part of Franklin Templeton Investments, which oversees about $879 billion.

In addition, global tensions in emerging markets and higher U.S. Treasury yields could damp enthusiasm as the U.S. Federal Reserve scales back its bond-buying program.

“Sentiment can be fairly fickle, and the gyrations can be quite quick. I’m a bit reluctant to jump on the bandwagon and say things are all over,” said Mitul Kotecha, global head of currency strategy and global markets research for Asia at Crédit Agricole in Hong Kong. “When you look at the external environment, it’s going to be more difficult in the months ahead, and I don’t think this is by any means to be a one-way bet.”

But investors in Jakarta say that, while the markets remain vulnerable to U.S. monetary policy, long-term money managers are adding money and willing to ride out any volatility.

“You have to look at the type of investors that have been investing in Indonesia. Previously, we had seen some short-term hedge funds, now there are more sovereign-wealth funds and foreign central banks, which are willing to hold positions in government bonds,” said Ezra Nazula, head of fixed income in Indonesia at Manulife Asset Management, which has $258 billion under management.

“The positive sentiment is here. We have seen foreign investors adding allocation and in terms of local investors, for us, we have seen more stable inflows compared to last year and that would give us the ammunition to buy,” Mr. Nazula said.

He said his fund has been increasing its allocations to 10-year local-currency and dollar-denominated Indonesian government debt, and selectively in Indonesian corporate bonds

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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