Prices down, but hold off on buying Indonesia stocks for now, strategists say

Jakarta

INDONESIA'S key stock index may be down 14 per cent from its February peak but it still isn't time to get back into equities in South-east Asia's biggest economy.

That's the message from Morgan Stanley analysts Sean Gardiner and Aarti Shah and Aberdeen Standard Investments investment director Bharat Joshi, who 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 Mr Gardiner, writing in a report dated Sep 5. Unless policymakers build the impression of a credible approach towards stabilising the currency, which is down almost 9 per cent this year and the worst performer in Asia after the rupee, foreign investors will stay away, Aberdeen's Mr Joshi says.

The Jakarta Composite Index fell 3.8 per cent Wednesday, its worst one-day drop in two years as investors girded for 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$3.7 billion from the equities market this year, set for the biggest annual outflow from Indonesia ever. The benchmark index closed 1.6 per cent higher Thursday, the steepest daily gain since Aug 20.

Other headwinds for corporate profitability include the introduction of import tariffs and postponement of infrastructure works. "All this while, earnings are already running below trend this year," Mr Gardiner said.

Indonesian asset classes may remain under pressure if the sell-off in emerging markets continues, said Goldman's Nupur Gupta in a Sep 5 report. He said Indonesian policymakers will 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 per cent premium compared with Asia ex-Japan stocks, according to Mr 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," Mr Joshi said in a phone interview.

Not all strategists are bearish. Amica Darmawan, a fund manager at PT First State Investments Indonesia, said the government has become more proactive and creative in handling the current situation which should be enough to shore up confidence in the currency.

"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," she said.

Even for Mr Gardiner, there are still some pockets of opportunity. He said telecommunication stocks are favoured, given the return of pricing power after a nine-month price war.

"I'm always an optimist. Indonesia still has very strong fundamentals, it's just the headwinds and the currencies that are going to leave some damage in the short-term," he said.

In an attempt to stem the rupiah's fall, Indonesia said it will raise import taxes on more than 1,000 goods ranging from cosmetics to cars, as part of measures aimed at cutting imports, the finance minister said on Wednesday.

The import tax will be raised to up to 10 per cent on 1,147 mostly consumer goods, from an existing 2.5 per cent to 7.5 per cent, effective next week, Finance Minister Sri Mulyani Indrawati told a news briefing.

"We want to be alert, but we also want to be selective. These are unusual times, so we are carrying out measures that we wouldn't do during normal times," she said. BLOOMBERG, REUTERS