Indonesian stocks are traded by Japanese investors every day, but one recent request from Tokyo was out of the ordinary. A big investor phoned up a local fund manager asking to buy $1bn in equities on the Jakarta stock exchange within just 20 days.
Jakarta is not liquid enough to handle that kind of money. But the anecdote shows the scale of interest that has made it one the worldâ€™s best performing stock markets this year.
According to EPFR, a research firm that tracks fund flows, net inflows into equities in the first half of 2010 were $971m. At that rate, net inflows are on track to top last yearâ€™s $1.1bn. Much of that came from Japan, which recently upgraded Indonesian government debt to investment grade and is the largest foreign, long-term investor in the nation. With sturdy economic growth, stable politics, low inflation and a consumer market of 240m people, there is an unusual absence of bears questioning Indonesiaâ€™s prospects. It seems Asiaâ€™s sleeping $600bn tiger has finally awoken.
â€śYouâ€™ve got a scenario of very sustainable 5.5 per cent to 6 per cent growth, historically low inflation prevailing for some time, a stable currency and bond yields falling to record lows,â€ť says Tim Condon, chief economist for ING Asia. â€śThis is a very attractive climate for investors.â€ť
Indonesia, which broke from three decades of authoritarianism 12 years ago and is the worldâ€™s largest Muslim nation by population, has struggled to lift direct foreign investment back to levels seen before the devastating 1997-98 Asian financial crisis. Deeply entrenched corruption, failing infrastructure and legal uncertainties remain big concerns, particularly for new businesses.
But those fears have been giving way over the past 18 months to a sense that Indonesia is the next big emerging market and should not be missed out on.
Indonesian equities are now valued at an average multiple of 17.5 times the consensus of forecast earnings this year and 15 times 2011 profits. That compares with an average multiple for the emerging markets universe of 11.9 times 2010 earnings and 9.9 times next yearâ€™s profits. The Jakarta composite index rose 86 per cent in 2009 and is up 19.4 per cent this year. It was a safe haven when most economies slipped into recession, largely because two-thirds of gross domestic product is generated by domestic consumption.
Morgan Stanley warns that the countryâ€™s stock market is over-priced compared with India and China or south-east Asian peers. Others analysts say Indonesia is too poor and has too small a middle class to be ranked investment grade.
But Mr Condon says: â€śIn a world of considerable uncertainty, countries that are able to show resilience and some insulation from that uncertainty, like Indonesia has shown, will remain standouts ... that will continue into the second half.â€ť
Foreign buying of bonds has driven down the yield on the 10-year government issue to slightly more than 8 per cent this year. EPFR says net inflows into the countryâ€™s bond markets have been $2.1bn this year, making Indonesia second only to Mexico among emerging markets in attracting bond investors. Investors are optimistic about the rupiah and sound monetary policies under the first directly elected leader, President Susilo Banbang Yudhoyono. The economic outlook is also robust. Interest rates are expected to remain steady, although a surprise spike in July inflation above 6 per cent could prompt a sooner-than-planned rate hike.
Ito Warsito, president director of Jakartaâ€™s stock exchange, says market capitalisation has more than doubled since the end of 2008 to more than $250bn. His goal is to take public 75 companies and boost the market capitalisation to $300bn by the end of 2012.
â€śMy main focus is market capitalisation,â€ť Mr Warsito says. â€śThe current appreciation of our index and prices also creates a burden, but it is a nice problem for us.â€ť
Investors are looking to buy shares in the natural resources, banks, infrastructure and consumer goods industries. Upcoming IPOs will include miner PT Berau Coal, telecommunications company Tower Bersama Group, Krakatau Steel and the national airline, Garuda.