Indonesian equities have bounced up and down this year around markets’ expectations for the new government’s fiscal plans. We’ve had the busts - should we expect a boom?
The erratic behaviour of Indonesian equities this year - represented by the blue line on this week’s Chart Room - is perhaps surprising given the country’s structural strengths. Indonesia is among a handful of Asean nations benefiting from a favourable demography and international companies’ pattern of nearshoring their supply lines away from China. Stocks are still cheap relative to impressive levels of growth in recent years, and the idiosyncratic composition of the market means it tends to perform differently from global equities.
Given all this, you might look back on the sell-off in March (prompted by the election of President Prabowo) as a buying opportunity that went begging. The incoming president wasted little time in reassuring markets of his fiscal responsibility off the back of concerns over ambitious spending plans. Stocks then went on to enjoy an upward trajectory until the year’s second sell-off in September, this time triggered by developments in China when news of a stimulus package drew investors away from Indonesia.
Investors’ decision to step back neglects lessons that could have been learned less than six months earlier. As before, Indonesia’s long-term growth story has not changed; if anything, it would be bolstered by a resurgent China. Beijing is Jakarta’s largest trading partner - a relationship that further blossomed as western markets turned their gaze from China. What’s good for China is, broadly speaking, good for Asean.
Moreover, the reappointment in October of Mulyani Indrawati as finance minister has further reassured markets over the new regime’s fiscal plans. Her appointment was an explicit nod to stability. Indrawati has served two presidents over the past 20 years, and consistently kept Indonesia’s budget deficit within its 3 per cent legal limit of GDP during her last stint.
Indonesia’s stock market performance this year has been dominated by two dips. It has recovered well from one, and we may be just getting started on the second recovery.