Taking Stock: Indonesia next in line for Asia's election bump

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HONG KONG (May 21): While the trade war remains the chief concern for investors just about everywhere, it seems elections are the only way to pierce the gloom.

Indonesia’s Jakarta Composite Index rose as much as 1.5%, for a second day of gains, after its biggest weekly slump in more than a year made it the first in Asia to erase this year’s rally. And just like Monday’s surge for Australian and Indian stocks, it is election results pushing shares higher.

Indonesian President Joko Widodo was declared the winner by a double-digit margin in official results announced a month after the bitterly contested election. Jokowi, as Widodo is known, won by an 11% margin over Prabowo Subianto, the results showed.

Some semblance of political stability in Indonesia would go a long way towards staunching the bleeding Southeast Asia stocks have suffered recently.

A basket of BlackRock Inc exchange-traded funds tracking equities in markets, including Indonesia, Malaysia, the Philippines, Thailand and Singapore, now show combined net outflows of US$322 million over the past two weeks, the biggest since an eight-week slide in November 2016, according to data compiled by Bloomberg.

Morgan Stanley analysts Sean Gardiner and Aarti Shah are bullish: “In the post-election environment, we expect to see the return of private sector confidence and related capex” to Indonesia, they said in a May 19 report published ahead of the official results.

Indonesia is Morgan Stanley’s favorite among major Southeast Asian equity markets, the analysts said in their mid-year outlook, with the country the top preference thanks to “decent” upside from current levels and an attractive 12-month forward valuation of less than 14 times earnings.

“The next three months will remain a volatile period for Indonesian equities — rising U.S. dollar, high oil prices and seasonal current account outflows along with MSCI rebalancing headwinds,” the analysts said. “But we stay overweight despite recent underpeformance for the same reasons we have been bullish for the past six months.”

Rate cuts seen in the second half of this year will be a key catalyst and bring back foreign investors who have largely ignored the market since January, they said. Earnings growth will accelerate and reform talk is gathering pace, they added.

Other markets with some upside include Malaysia and Singapore, while Thailand is the least-loved due to unattractive valuations and the risk earnings will deteriorate with little room for central bank stimulus, implying downside from current levels, the analysts said. The pair also slashed their earnings per share forecasts for 2019 and 2020 by 10% on growth slowdown concerns.

Still, Indonesia remains in the red for the year. And the benchmark needs to climb more than 3% to break even.