Indonesia's stock market charges ahead

published 11 April 2014

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.

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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 investorshave 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.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.