Indonesian stocks’ around 15 percent tumble from their recent peak may have spurred “taper tantrum” redux fears, but a crisis is the best time to build positions in the country’s growth story, Societe Generale said in a note on Wednesday.
“Indonesia has for long been an attractive EM market for foreigners, but also bears the brunt during times of changing financial conditions,” it said. “The rise in U.S. Treasury yields toward 3.0 percent saw foreign investors withdraw $1.7 billion in April, given the high correlation of Indonesia’s rupiah to U.S. Treasury yields.”
Indonesia’s bond market has a high foreign ownership at around 40 percent, as its high yields make it attractive to foreign investors, but also make it susceptible to sharp outflows, the bank noted. But with its expectation that U.S. Treasury yields weren’t likely to climb much over 3 percent, there was likely limited further downside to the equity market, the bank said.
Taper tantrum redux?
It noted that the decline has spurred fears of a repeat of the taper tantrum. Starting from 2013, when then Federal Reserve chief Ben Bernanke first broached the idea he might begin to taper the central bank’s quantitative easing program’s asset purchases, global markets underwent a severe selloff, as funds flowed out of emerging market assets, particularly from countries with current account deficits.
But Societe Generale said that economic fundamentals in Indonesia were now much healthier than during the taper tantrum, as inflation is under control, the current account deficit is normalizing and the fiscal deficit is “high quality” amid subsidy reforms.
“A peek at history reveals that Indonesia has sharp corrections and rebounds. The recent correction makes valuations look more comfortable, with the market’s 12-month trailing price-to-earnings at 16 times, in line with the five-year average,” it said. “A combination of demographic dividend, low debt (corporate and household) and under-ownership of the equity market provides a long runway for growth, which should see investors return to the market quickly.”
It tipped banks as the best proxy to the recovery, noting Indonesia’s banks are among Asia’s most profitable. It said the slowdown in credit growth appeared to be bottoming and non-performing loans were peaking.
“We expect the banks to deliver stronger credit growth of 9-10 percent in 2018 and see return on equity (ROE) rising further with improving asset quality, resulting in lower credit costs,” it said. “We think the banks offer value at a 14 times 12-month forward price-to-earnigns and ROE of 15 percent against the current macroeconomic backdrop, and the recent correction makes them more attractive.”
The IDX Composite Index, previously called the JSX composite, ended Wednesday up 0.29 percent at 6012.238; it’s down 5.4 percent year-to-date and more than 10 percent from its mid-February intraday peak.