IT’S the world’s worst-performing emerging stock market since the election of US President Donald J. Trump and the only developing South-east Asian exchange to see outflows this year.
Investors are concerned over a religious feud that’s erupted in the race for Jakarta governor, government attempts to gag criticism and a rate-cutting cycle that looks to have ended. The Jakarta Composite Index (JCI) has fallen 3 percent since November 8, when Trump’s win fueled expectations for a stronger dollar and faster Federal Reserve rate increases, compared with a 1.3-percent advance in a gauge of emerging-market equities.
Voters go to the polls February 15 in a contest in which the incumbent governor, an ethnic Chinese Christian who’s an ally of President Joko Widodo, has appeared in court over charges he insulted Islam. Hundreds of thousands of Muslims have taken to the streets in protest, with the race viewed as a possible precursor to a conservative Muslim challenge against Widodo in the 2019 presidential vote.
“The Jakarta election is being seen as a struggle between those who believe that Indonesia should remain a moderate country and the right wing movement,” said Jemmy Paul, investment director at PT Sucorinvest Asset Management in Jakarta. “Foreigners also see this as posing a risk to the ability of President Widodo to continue his reform agenda.”
Overseas investors have been trimming their positions, Paul said. Foreign funds pulled $110 million from local equities this month through Wednesday, compared with inflows of $152 million in Thailand and $77 million in Malaysia. Paul, who said he still targets a 13-percent increase in the stock benchmark this year, said they may reenter the market after the election. The JCI declined 0.2 percent as of 9:08 a.m. local time on Friday.
Factors that are weighing on Indonesia’s stock market:
- Jakarta Governor Basuki Tjahaja Purnama, who was Widodo’s deputy before he became president in 2014, has been charged with blasphemy for comments saying voters were being deceived by people trying to use Koranic verses to say that Muslims were not permitted to support a Christian leader. Purnama has denied the charges. He leads the three-way race with a 38.2-percent support in a poll by Indikator Politik Indonesia, the Jakarta Post reported on Thursday. The government said on January 3 it was cutting all business ties with JPMorgan Chase & Co. because of a November note in which the US firm downgraded its assessment of Indonesian equities by two notches. It also said other banks that are primary dealers for its sovereign-bond issues should maintain professionalism and integrity. JPMorgan last week raised its tactical view on Indonesian stocks by one level to neutral. Rising US interest rates and a stronger greenback are weighing on the rupiah this year, with the 13,836 a dollar year-end median estimate of analysts implying a 3.5-percent drop from current levels. Morgan Stanley is predicting two 25-basis-point rate increases by Bank Indonesia in the second half of 2017 to stem inflation and says “risks are tilted to the downside” due to the global headwinds, according to a Jan. 17 note by strategists Sean Gardiner and Aarti Shah.
Indonesia’s reaction to the JP-Morgan note and the apparent influence of religion on the political process are causes for investor concern, said Michael McCarthy, chief market strategist at CMC Markets in Sydney.
President Widodo is popular with the market for his scrapping of most fuel subsidies, and his focus on infrastructure and opening Indonesia up to more foreign investment.
Temporary drag
Not everyone is pessimistic about Indonesian stocks. Their relatively low valuations—the cheapest after Thailand among Asean emerging markets—and the government’s infrastructure spending plans may provide support.
Andrew Swan, the Hong Kong-based head of Asian fundamental equities at BlackRock Inc., said Indonesia remained among his most-favored markets due to its cyclical recover story, citing a preference for financial and infrastructure stocks. Harry Su, head of research at PT Bahana Securities in Jakarta, forecasts the benchmark index to rise more than 10 percent to 6,000 later this year once the election uncertainty clears.
“Unless religious and racist issues on the ground are resolved, investments won’t be forthcoming” Su said, adding that the political situation is acting as a temporary drag on the JCI.