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Ratings upgrade no boon for Indonesia stocks as investors seek value elsewhere
Reuters - July 26, 2017
Investors are cutting exposure to a market with one of the highest valuations in Asia, in favor of North Asia's cheaper, better-performing technology-exporting markets. An increase in earnings downgrades, a listless currency and slow progress on regulatory reform amid political uncertainty are also keeping investors at bay.
"As a market, Indonesia is quite expensive. And earnings growth has been a bit sluggish compared to some other markets," said Andrew Gillan, Asian portfolio manager at Janus Henderson Investors in Singapore. "And the politics haven't been as positive."
Investors' indifference to the ratings upgrade is a blow to the government's hopes to attract an additional $10 billion from pension funds and other institutional investors over the next two years.
Officials at the Indonesian Ministry of Finance and financial regulators did not respond to requests for comment.
In a classic case of "buy the rumor, sell the fact," inflows rose in the run-up to the rating change in May, but reversed as hedge funds that anticipated the upgrade took profits.
Foreigners sold $372 million in May and June, according to Thomson Reuters data. That compares with net inflows into almost every other major Asian market during that time except China and Malaysia, for which data is not yet available. Investors bought $1.7 billion of Indonesian stocks in the first four months of 2017, and $645 million in the same period a year ago.
Market participants remain skeptical that Indonesian shares have enough catalysts to outperform their regional counterparts, particularly as MSCI Indonesia has risen 3.7 percent since just before S&P's May 19 upgrade, about two-thirds of the gain of the MSCI Asia ex-Japan index.
Henderson's Asian Growth Fund, which Gillan manages, has a 2 percent exposure to Indonesia through only one stock, conglomerate Astra International.
Earnings downgrades
Indonesian stocks are trading at 16 times forward earnings, a 36 percent premium to the long-term average, according to DataStream. In contrast, Korea is at 9.3 times and Taiwan at 14 times.
"Valuations are not very cheap right now. Investors will be waiting for the next catalysts, which are likely to be the second-quarter [economic growth] figures and second-quarter earnings," said Andre Varian, portfolio manager at BNI Asset Management.
However, earnings revisions for Indonesia, which were positive early this year, have now turned negative. Technology-exporting North Asian markets, on the other hand, have seen positive revisions.
"Tech companies are now the largest components of MSCI Asia, and people do tend to gravitate to that sector," said Jalil Rasheed, investment director, head of the Singapore office at Invesco.
"So when investors are putting money into those markets, it does mean that they're recycling capital from other parts."
Still, the fund manager remains overweight Indonesia in its Southeast Asia portfolio, on the strength of individual companies. Bank Central Asia, Telekomunikasi Indonesia and Astra International are among the Invesco ASEAN fund's top 10 holdings.
Lagging currency, reform progress
The Indonesian rupiah, whose strength would be a draw for investors, is only up about 1.2 percent this year against the US dollar, compared with the Taiwan dollar's 7 percent gain.
A drop in Chinese imports of thermal coal, which account for about a third of Indonesia's exports, is another headwind.
"We do not see any tightening in 2017," strategists at Jefferies, led by Sean Darby in Hong Kong, wrote in a July 6 note. "With commodities accounting for approximately one third of Indonesia's exports, the currency is not likely to find any renewed strength."
A resurgence of political risks – including some militant attacks and worries about religious extremism – as well as slow progress on the government's reform agenda, such as infrastructure development and cutting regulatory red tape, are also giving investors pause.
"Investors have been disappointed by the lack of progress on reform," said Mark Mobius, executive chairman of Templeton Emerging Markets Group at Franklin Templeton Investments, which has about 2 percent of global emerging market assets in Indonesia following a small reduction this year.
"It seems that the government has been overwhelmed by Muslim extremism, which has frightened international investors who worry about political instability."
[Additional reporting by Gaurav Dogra.]
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