Hold off on buying Indonesia stocks for now
Analysts say Thailand has emerged as haven from the EM rout
DUBAI: Indonesia’s key stock index may be down 15% from its February peak but it isn’t time to get back into equities in South-East Asia’s biggest economy, Morgan Stanley analysts Sean Gardiner and Aarti Shah opined.
Aberdeen Standard Investments investment director Bharat Joshi said the rupiah’s weakness may keep investors away as emerging-market 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 policy makers 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.
There is 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$3.7bil from equities market this year, set for the biggest annual outflow from Indonesia ever. Other headwinds for corporate profitability include the introduction of import tariffs and postponements 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 emerging markets 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 with 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 sub-par, Joshi said in a phone interview.
Not all strategists are bearish. Amica Darmawan, a fund manager at PT First State Investments Indonesia said: “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.”
Indonesia’s biggest problem is the country’s addiction to oversea’s money to fund deficits. Foreign ownership of Indonesian’s government bonds grew from 33% in 2014 to 40% 2017.
To be sure, that wasn’t just hot money. Many of the buyers of those bonds are top-quality long-term investors that don’t flee at the first sign of weakness.
It is a different story in Thailand, the birthplace of the Asian financial crisis two decades ago. The country has emerged as a haven from this year’s emerging-market rout.
The baht has outperformed every other developing-nation currency in the past month as the turmoil centred on Argentina and Turkey began to spread across emerging markets.
Thailand’s large current-account surplus and foreign-exchange reserves, and a relatively low level of overseas ownership have cushioned any impact. Nomura Holdings Inc and Aberdeen Standard Investments expect the currency to remain resilient.
There’s “low ownership, so little selling,” said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Standard Investments.
“You would need a pretty substantial mega-crisis to trigger a sell-off in the Thai baht.”
The possibility that the Bank of Thailand will raise rates is “an added tailwind” for the currency, Nomura analysts, including Craig Chan, wrote in a report on Sept 5.
Policy makers will likely raise the benchmark rate to 1.75 % by the end of the year, from 1.50 %, according to the median forecast of economists in a Bloomberg survey.
The baht has strengthened more than 1% in the past month, while currencies from Turkey to India slumped to record lows as a rollback in US Federal Reserve stimulus and global trade skirmishes dented demand for riskier assets.
The yield on Thailand’s 10-year government notes has risen 43 basis points to 2.77% this year, significantly less than the increase recorded by Indian and Indonesian debt, which have borne the brunt of the sell-off in Asia.