Indonesia’s stock market charges ahead

The Indonesian stock market, having fallen by a fifth last year, has made a remarkable comeback. The Jakarta Composite Index has bounced by 10% this year – 20% in dollar terms – and looks unlikely to run out of steam just yet.

Interest rate hikes by the central bank stabilised the currency, which slid last year amid fears over reliance on foreign capital: the current account deficit had reached 4.4% of GDP.

But the external gap has eased now, as higher interest rates helped curb imports by dampening consumption; also, the cheaper currency bolstered exports.

This should continue, says Aberdeen’s Hugh Young. The rupiah is still cheap against the dollar and interest rates are 7.5%.

Once investors see that the current account position is improving further, the increasingly stable currency will combat inflation, possibly facilitating lower interest rates. That will boost consumption, which currently makes up 56% of GDP.

And there is ample scope for the “huge domestic market” to keep expanding over the long term. Indonesia has 251 million people, of which almost half are under 24.

Given the medium- and long-term promise, it’s no wonder investors have rediscovered the market.

The imminent election of a new pro-business president, Jakarta governor Joko Widodo, is providing additional pep. On this front, however, investors may be getting carried away, says Ben Bland in the FT.

He has said very little about his intentions and it’s hardly a given that he can push any major changes, such as a clampdown on corruption and bolstering infrastructure investment. All in all, however, our favourite Indonesia play, Aberdeen’s Indonesia Fund (US: IF), still looks reasonably valued on a 9% discount to its net asset value.

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