Indonesia’s capital market is starting to flourish. Foreign investors are buying portfolio of stocks and bonds in Indonesia. This phenomenon is predicted to continue in the political year of 2019. Although foreign capital is returning, pressure from rising investment risk still looms.
In recent weeks, investors started to buy shares in the Indonesian capital market. Based on RTI data, foreign investors recorded a net buy of Rp 4.99 trillion in the past week. Total net buy in one month was Rp 8.1 trillion. Although it has not been able to keep up with the foreign net sell of Rp 47.99 trillion since the beginning of the year, this is a good start at the end of the year.
Foreign funds have begun to flow into state bonds (SUN) since 19 October. The inflow of funds almost reached Rp 20 trillion as of 5 November 2018. This was touted as being impacted by various factors, such as the attractiveness of SUNs due to low prices and the offer of high yields, the strength of the domestic economy, and the reduction of trade war tension.
The flow of foreign capital is predicted to re-enter the bond market and the stock market in developing countries, including Indonesia, in line with the reduction of pressure on the financial market in the fourth quarter of 2018. The indication can be seen from the foreign investors’ net buy of Rp 1.3 trillion in the stock exchange and Rp 5.86 trillion in the bond market over the past week.
In the midst of global and domestic sentiment, Morgan Stanley gave overweight recommendation to Indonesia. This international financial institution advises its clients to expand their investment portfolios in Indonesia rather than in other emerging markets. The recommendation released on Monday (11/5) through a report entitled “Indonesia: the Case for Outperformance, Going OW” became one of the JCI’s recent strengthening factors, which almost reached 6,000 yesterday (11/9).
Foreign capital outflows from the Indonesian stock market occurred within 11 months, which was much faster than developing countries. Since mid-2017, the fund outflow has reached US$ 7.7 billion. Foreign ownership of free-float shares in MSCI Indonesia index also fell to 72.5 percent from 75 percent, which was equivalent to US$ 65 billion. This brings opportunity to foreign investors to increase their portfolio in Indonesia.
The government’s monetary and fiscal steps were deemed positive, such as BI’s move to shift the direction of its policy from growth to economic stability, benchmark interest rate increase to 150 basis points, easing on property sector loans, government policy to reduce imports by requiring the use of 20 percent biodiesel, import tariff increase for 1,000 items, and postponement of a number of infrastructure projects.
Morgan Stanley Asia Analyst Sean Gardiner said positive growth was also seen in consumer goods and loans amid the dynamics of the global economy this year. As a result, investors viewed the Indonesian stock market as very prospective compared to stocks in other emerging markets.
MSCI (Morgan Stanley Composite International) Indonesia Index is predicted to rise at least 7 percent from the current position to the level of 6,906 at the end of the year. In 2019, the index has the opportunity to grow 11 percent, with the potential for share profit growth to reach 14 percent.
The banking and telecommunications sector shares are the most popular. Positive loan growth will boost banking stocks, while telecommunications shares rise in line with the high use of mobile data and the end of tariff war. Raw material sector shares are classified as underweight until next year.
Director of Investment Strategy and Head of Macroeconomics at PT Bahana TCW Investment Management Budi Hikmat said foreign capital will return to Indonesia in line with the improvement of investor sentiment towards emerging markets. Valuation of emerging markets is already cheap and it adds to investor confidence that Indonesia’s economic fundamentals are stable.
Despite the negative sentiment, Indonesia still gives strong economic indicators. Tax revenue, which grew 17 percent last September, reflects the government’s ability to internally finance the state budget. Moreover, domestic data such as car and motorcycle sales improved and bank credit as of September 2018 also grew 12.6 percent from the same period last year.