Will Indonesia's bull run continue?
However, the catalyst for the US dollar's rise was the Eurodollar/Fed funds futures markets selling, not the Kremlin's land grab in the Crimea. Dr Janet Yellen, not Putin's Anschluss (German word for annexation) boosted the dollar. Something strange is happening in South-east Asia. The Indonesian rupiah has risen seven per cent against the US dollar in the past three months, thanks to the fall in the current account deficit to two per cent, capital flows into Indonesian equities and a rise in the central bank reserves to $102 billion. Something is surreal in Planet Forex if the world's best-performing currency against the dollar is the rupiah, justly maligned as a member of the Fragile Fire after it lost 21 per cent of its value in 2013. So what gives?
The world is mesmerised by the meteoric political rise of the BJP's Gujarat Chief Minister Modi in India. However, I am equally interested in Joko Widodo, the Governor of Jakarta, who could well be President Yudhoyono's successor in the July 2014 election. This could be a game-changer in Indonesian economics, politics and finance since Widodo is unquestionably the most popular politician in South-east Asia's largest, most populous economy. I realise the rupiah strength and trade deficit compression is reversible, that Indonesia is both high-beta and hyper-volatile. However, we are on the eve of the most critical free election in the history of post-Suharto Indonesia (there were no free elections under Suharto and Sukarno). As with the original Thaksin (2003) and Aquino (2012-13), stock markets can be galvanised by political game-changers.
This is not to underplay Indonesia's macroeconomic risks. China is Indonesia's major export market -- and China's credit bubble is now skating on thin ice. The free-fall in iron ore, copper and thermal coal are all negatives for South-east Asia's largest commodity exporter. If any emerging market was more exposed to the triple whammy of higher US Treasury bond yields, lower commodities prices (Indonesia is the world's largest exporter of coal, as it was of pepper and cloves in Rembrandt's Amsterdam) and Chinese import demand, this is it.
However, Indonesian equities have been on a roll in the past six months, as offshore fund managers accumulate local shares. Widodo has succeeded in infrastructure development, health care and tax collection, three metrics crucial to boost Indonesia's economic potential and sovereign credit rating. The footprints of the foreign herds can be seen in the outperformance of large cap, liquid shares that are election/reflation beneficiaries. These include Bank Mandiri, Astra International, PK Telekom, Indocement. Indonesian corporate earnings could well rise 15 to 18 per cent in 2014 as the new president reflates the economy and boosts infrastructure spending. After all, more than two-thirds of companies in the Jakarta index beat Q4 earnings. Indonesia is not expensive at 13.8 times earnings. Indonesian banks/consumer shares are a buy on any sell-offs this spring and summer.
Indonesian democracy contrasts with the protracted red/yellow shirt chasm in Thailand, one-party rule and ethnic politics in Malaysia, a Marxist-Leninist dictatorship in Vietnam and Praetorian rule in Burma. The Jakarta index has now risen 17 per cent in US dollars in the first three months of 2014. However, it is entirely possible to see another 15 to 20 per cent upside in Indonesia as earnings growth momentum accelerate, Joko's 30 points poll lead strengthens and the sovereign credit risk compresses until July. Indonesia trades at 2.6 times book value (ex-Unilever) but its RoE is the highest in South-east Asia at 23 per cent. This high RoE is a testament to Indonesia's high-margin, vast consumer economy. Is 2014 finally the year of living (less) dangerously in Jakarta? I think so.
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