INDONESIAN stocks are tumbling at the fastest pace worldwide as investors lose faith in Joko Widodo’s ability to revive Southeast Asia’s largest economy.
The Jakarta Composite Index has dropped 3.6 per cent since the coalition of parties opposing President-elect Widodo, known as Jokowi, succeeded in electing one of their own as parliamentary speaker on Oct 2.
Alan Richardson, whose Samsung Asean Equity Fund beat 96 per cent of peers over the past five years, predicts the gauge may drop 6.6 per cent to 4,800 in October. Foreign funds pulled US$344 million from the shares last week, the biggest outflow this year, exchange data show.
The durability of the so-called Red-White coalition that backed losing presidential candidate Prabowo Subianto will threaten the ability of Jokowi, who takes office on Oct 20, to implement a policy agenda that includes cutting fuel subsidies, improving tax collection and reducing bureaucracy.
The benchmark stock gauge is valued at 14.2 times 12-month estimated earnings, or 33 percent more than the MSCI Emerging Markets Index.
“The rising political risk premium in Indonesia means the market’s premium to the region is unjustified,” Richardson, an investment manager at Samsung Asset Management Ltd. in Hong Kong, said in an interview. “I have trimmed Indonesia to underweight from neutral in September,” he said, adding that he projects property and banking stocks will retreat the most.
The Jakarta Composite (JCI) index has advanced 16 per cent this year, fueled by US$4 billion of foreign inflows, on speculation Jokowi will revive economic growth from the lowest level in almost five years.
A gauge of construction, property and real-estate stocks has jumped 27 per cent on expectations the new president will build more roads, seaports and allow foreigners to buy apartments valued at more than 2.5 billion rupiah (US$204,717).
The recent losses for offshore investors in Indonesian stocks have been exacerbated by a weakening rupiah, under pressure from the political situation, and as the Federal Reserve moves toward ending its stimulus program and raising US interest rates. The rupiah fell 3.7 per cent in the past month, the most among Asian emerging markets after Korea’s won.
In the “worst-case scenario” of no political improvement and a hawkish Fed, the Jakarta share gauge may drop to the 4,600 to 4,800 range, said Mixo Das, an Asia ex-Japan equity strategist at Nomura Holdings Inc in Hong Kong.
“The market was run up by foreign investors buying on the hope that Jokowi will prevail despite the adversities,” Das said in aninterview. “Since the vote on direct local elections this optimism has been fading. I think it would be appropriate for regional investors to trim back Indonesian equities further to wait for more clarity.”
“If Jokowi can move a couple of smaller parties over, the dormant domestic investors may find reason to get into the market,” Nomura’s Das said.
Infrastructure-related stocks are the most exposed to political gridlock, Deutsche Bank AG analysts Heriyanto Irawan and Samuel Sentana wrote in a Sept 25 research note in Jakarta.
Construction companies PT Wijaya Karya and PT Pembangunan Perumahan fell 9 per cent and 3.9 per cent, respectively, in the three sessions through today. Producers of consumer staples, such as cigarette maker PT Gudang Garam and PT Indofood CBP Sukses Makmur, would be the most resilient, the analysts wrote.
“Winning the election wasn’t the hard part, it’s going to be an uphill struggle for Jokowi to push through certain reforms,” Kenneth Akintewe, a senior investment manager at Aberdeen Asset Management Plc in Singapore, which oversees US$541 billion said. “We haven’t changed our long-term view of Indonesia, but this does mean that we’ll be attributing a higher risk premium.” — Bloomberg