Indonesian bonds and the rupiah will probably extend this month’s declines as accelerating inflation spurs the central bank to raise interest rates, according to the nation’s biggest mutual fund manager.
The rupiah, which fell the most since February 2009 this month, may weaken a further 3 percent to 4 percent, Michael Tjoajadi, the chief executive officer of PT Schroder Investment Management Indonesia, said in an interview today in Jakarta. Schroder will wait for 10-year bond yields to rise to at least 8.4 percent, from 7.83 percent today, before buying, he said. The central bank will probably raise interest rates again this year as inflation climbs to 8 percent from 5.9 percent in June, Tjoajadi said.
Indonesia’s rupiah led declines in emerging-markets this month as the central bank allowed the currency to slide toward levels quoted in offshore markets. Foreign-exchange reserves dropped below $100 billion in June for the first time in more than two years and the country recorded trade deficits in seven of the eight months through May. Schroder favors Indonesian shares, Asia’s worst performers this month, after valuations declined 14 percent from this year’s high in May.
“The problem with Indonesia is our currency,” said Tjoajadi, who oversees 39.4 trillion rupiah ($3.83 billion) for the Indonesian unit of Schroders Plc, Europe’s largest independent money manager.
Bank Indonesia has raised its reference rate 75 basis points, or 0.75 percentage point, to 6.5 percent in the last two months to support the rupiah and combat inflation. The central bank will probably increase the rate another 50 basis points this year, Tjoajadi said.
Schroder currently has 10 percent to 15 percent of its assets in cash, up from about 5 percent in March, Tjoajadi said. The fund will probably increase bond and stock holdings by the fourth quarter, he said.
Tjoajadi prefers the media industry and consumer staples companies, including PT Unilever Indonesia and PT Indofood Sukses Makmur, that can pass on higher costs to customers.
The Jakarta Composite index dropped 4.3 percent this month, the most among 18 Asian equity indexes tracked by Bloomberg. The gauge is valued at about 14 times analysts’ 12-month earnings estimates, down from about 16 in May, the data shows.