Indonesia’s risk-on rally drives stocks to all-time high

[JAKARTA] Indonesian stocks on Thursday (Aug 14) rose to a record high in a broad rally across the country’s markets, as a strong economy and hopes for interest-rate cuts fuelled a sense of optimism.

The Jakarta Composite Index rose 0.5 per cent, taking its advances from an April low to more than 32 per cent. The rupiah jumped 0.5 per cent against the US dollar, beating most Asian currencies. Five-year government bond yields fell to their lowest level in more than three years.

The moves mark a reversal from earlier this year, when worries over slowing growth, fiscal discipline and rumours about the resignation of a prominent minister rattled investors. Now, surprisingly strong economic data and expectations of monetary easing have put markets in a potential Goldilocks zone, causing a U-turn in sentiment.

The surge in Indonesian shares is part of a broader rally across global markets this week. The S&P 500 closed at a record high on Wednesday, pushed higher by a better-than-expected earnings season. Treasuries have rallied. China’s Shanghai Stock Exchange Composite Index is close to its highest level in a decade.

Foreign investors have helped Indonesia’s market turn a corner. Global funds have bought a net US$283 million of local stocks so far this month, following heavy outflows earlier this year, according to data compiled by Bloomberg.

Investors now await President Prabowo Subianto’s State of the Nation address on Friday for cues on balancing populist spending with budget discipline.

“The market’s focus will be on the budget deficit forecast and whether there will be further measures to improve the fiscal position while at the same time supporting economic growth,” said Khoon Goh, head of Asia research at ANZ Banking Group.

Sentiment has improved as growth in the second quarter unexpectedly accelerated due to infrastructure development and machinery spending. Some economists said the trend could continue into the third quarter thanks to government stimulus and supportive monetary policy.

While there are concerns over the impact of high US tariffs on the nation’s goods, further policy easing by the central bank could boost the economy. Bank Indonesia lowered its benchmark interest rate last month – the fourth cut of an easing cycle that began last September.

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“There are expectations that the second half of the year will be better than the first half, with liquidity improving” in the markets, said Jerry Goh, investment director of Asian equities at Aberdeen.

Growing expectations that the Federal Reserve will start cutting its interest rates in September have weighed on the US dollar, which has fallen more than 8 per cent this year. That has brought billions into developing nations, including the South-east Asian region where stock benchmarks in Vietnam, Singapore and Indonesia have hit record highs.

Sentiment among local investors has also got a lift from the inclusion of several Indonesian companies in MSCI indexes. Declining government bond yields are helping to drive more domestic investors towards equities and other higher-yielding assets, with shares related to billionaire Prajogo Pangestu, such as Barito Renewables Energy, growing in popularity.

South-east Asia’s equity markets have “been trading at a substantial discount to their historical ranges, so even a modest positive shift can open the door for tactical investments into the region’s risk, and Indonesia is not an exception to that story,” said Homin Lee, a senior macro strategist at Lombard Odier in Singapore. BLOOMBERG