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Investors set to look to Indonesia in 2021: Analysts
Although Indonesia’s 10-year government bond yield has fallen by 225 basis points from its highest level in March, the country still offers a relatively high real yield of 4.4 percent, the second highest after that of South Africa.
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ndonesia is expected to remain lucrative for foreign funds in 2021, according to analysts, as investors are on a return hunt amid a low interest rate trend and quantitative easing measures implemented in various countries around the world.
As countries grapple to contain the COVID-19 pandemic, central banks around the world are expected to continue quantitative easing measures and maintain interest rates at a low level to spur economic activity. Such a situation is expected to bring foreign capital inflow to emerging markets, including Indonesia, Mandiri Sekuritas fixed income analyst Handy Yunianto said on Dec. 22.
“Ample liquidity and low yields will send foreign investors to seek high yield assets and Indonesia still offers that attractive yield,” he said during an online press briefing.
Although Indonesia’s 10-year government bond yield had fallen by 225 basis points from its highest level in March, the country still offered a relatively high real yield of 4.4 percent, the second highest after that of South Africa, he added.
Overseas investors were rushing to pull out their funds from the Indonesian capital market earlier this year as they turned their heads to safe haven assets, such as the United States dollar and gold, over fears of an economic downturn. The moves resulted in spiking bond yields, crashes at the domestic stock market and a weakening rupiah exchange rate.
However, foreign funds have been slowly flowing in since the second quarter of 2020 as investors regained their confidence following easing pandemic restrictions and hopes of vaccines.
As of Dec. 21, foreign investors held Rp 997.41 trillion (US$70.5 billion) of local currency bonds, 6 percent lower than the 2019 full year level of Rp 1.06 quadrillion.
With the ample liquidity, low interest rates and the world’s economic recovery, Handy expected Indonesia’s bond yields would continue to move southward in 2021. A bond's yield and price move in an inverse direction, in which a lower yield means a higher price.
“We expect the 10-year government bond yields to continue lowering to 5.75 to 6 percent,” he said.
Indonesia’s 10-year government bond yield stood at 6.15 percent on Monday, slightly lower than 6.17 percent in the previous session, Indonesia Bond Pricing Agency (IBPA) data showed.
Handy, however, warned investors that a surging number of COVID-19 infections and slow vaccine development might dampen next year’s economic growth, lower fiscal space and increase risk-off sentiment that might adversely affect the market.
The surging number of cases has prompted the government to further lower its gross domestic product (GDP) projection for this year to a contraction of 1.7 to 2.2 percent. The latest forecast is lower than one announced in September, when the government projected an economic contraction of 0.6 to 1.7 percent.
Next year, the economy is expected to grow around 4 percent.
Anugerah Sekuritas Indonesia fixed income analyst Ramdhan Ario Maruto also warned investors of the risk of further strict movement restrictions next year due to the rising infections.
“Investors will also keep a lookout on the vaccination efforts as they can help to slow the coronavirus spread,” he told The Jakarta Post over the phone on Monday.
However, he expressed confidence that foreign investor ownership of government bonds would go back to the pre-pandemic level of around 38 to 40 percent of the total debt papers from the current 34 percent as the gradual economic recovery would encourage banks to channel more loans and reduce their ownership in the bonds.
In addition, experts are also optimistic that foreign investors will flock to emerging economies’ stock markets. including that of Indonesia.
“Ample liquidity and a weakening US dollar will also make Indonesian stocks lucrative among foreign investors, attracting more foreign funds to the country,” Mandiri Sekuritas head of equity research Adrian Joezer said during the event on Dec. 22.
He expected the development of COVID-19 vaccines would lead next year’s economic recovery and eventually improve companies’ earnings growth. He projected the Jakarta Composite Index (JCI) to reach 6,850 to 7,300 in 2021.
The JCI, the Indonesia Stock Exchange (IDX) main gauge, stood at 6,093.55 on Monday, a 1.41 percent increase from its previous close on Wednesday prior to the Christmas holiday. The index has lost 3.27 percent of its value so far this year.
“Investors should also keep an eye on [any potential] mobility restrictions as they can reverse the stock market rally,” Adrian said as he preferred stocks of banks, retailers, telecommunication and healthcare companies.
