Indonesia gains confidence

Asian stocks have lost ground since the year began, but the market in Indonesia, southeast Asia’s largest economy, has bucked the trend.

Asian stocks have lost ground since the year began, but the market in southeast Asia's largest economy has bucked the trend. Jakarta's benchmark index has gained almost 5% this year and nearly 10% in dollar terms, ranking it among the top ten performers worldwide.

Indonesia's gains follow a turbulent year, when falling commodity prices dragged annual growth under 5%, the slowest pace since the 2008 financial crisis. But "everyone is bullish on Indonesia now", Jahanzeb Naseer of Credit Suisse told the FT. Inflation, which had been fuelled by a falling currency, has subsided, and the central bank has kept monetary policy easy and has cut its benchmark interest rate twice this year to stimulate growth.

If the rupiah stabilises, further rate cuts are expected, says CLSA strategist Sarina Lesmina in Barron's. Meanwhile, government spending has improved quite a lot and that has provided "a fillip to growth", adds Naseer.

It also bodes well that President Joko Widodo, also known as Jokowi, has been working on structural reforms to bolster the economy's speed limit. "Basically, people think that stuff is going to get done and that will lift growth," says Standard Chartered's David Mann.

"Across the region, countries that look like they're getting better at doing what they said they'd do are getting noticed." The government has trimmed red tape and pushed through new infrastructure projects. Last month the government opened up 35 sectors of the economy to foreign investors, a move lauded as a step in the right direction.

The long-term outlook, moreover, remains compelling. Half the 250-million-strong population is under the age of 24, implying ample scope for the labour force and consumption to expand, especially as household debt is still very moderate at 17% of GDP.

Our favourite Indonesia play, the Aberdeen Indonesia fund (NYSE: IF), is currently trading on a large discount of 16% to its net asset value.

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