Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

There are plenty of nooks and crannies in Asia to look for the effects of the Federal Reserve's interest rate policies. Indonesia is probably the most brightly lit. The country became a darling of emerging-market investors in the last decade by slaying its perennial problems of high inflation and still higher cost of capital. Then it fell out of favor as China's appetite for coal and other commodities waned, and the U.S. central bank raised the threat of increased borrowing costs.

China's economy is still not out of the woods. But with Fed policy makers now reducing their forecast for the U.S. overnight target rate to just two increases this year, compared with the four they indicated in December, the bull case for Jakarta-listed equities just got stronger. The lower the threat of a rout in the rupiah, the better the chances for Bank Indonesia to heed President Joko Widodo's advice and let the domestic cost of borrowing ``fall, fall, fall."

That could easily help kick-start a repair job on corporate profit margins.

Room to Rebound
Indonesian commodity exporters' profit margins have shrunk more than in other high-growth Asian economies
Source: Bloomberg

Expectations are already supremely optimistic. The Jakarta Composite Index, the world's fifth-best-performing benchmark this year, has gained more than 12 percent in dollar terms. Analysts' forecasts for year-ahead market returns for small companies such as Panorama Sentrawisata, a tour operator, and Rukun Raharja, which is laying a gas pipeline in east Java province, range between 56 and 145 percent.

The pessimism, on the other hand, is concentrated in commodity businesses such as palm-oil producer Austindo Nusantara and Harum Energy, a coal miner. Bumi Resources has sunk too deep into debt for small changes in interest rates to matter much, but a retailer like Matahari Department Store, which has pared its more than $300 million of debt down to zero in three years, has 22 buy recommendations from analysts and just one sell. Lower borrowing costs provide an opportunity for healthy corporate balance sheets to expand with higher leverage.

Small Is Beautiful in Indonesia
Estimated returns are the strongest for the smallest companies by market value*
Source: Bloomberg
*One-year average expectations of price returns based on analyst forecasts

The Fed's lower-for-longer stance gives the economy maneuvering room. Just how much of that is used will depend on the government and the central bank in Jakarta. With credible policies that keep the rupiah stable even with lower domestic interest rates, the optimism on Indonesian stocks could prove well founded.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andy Mukherjee in Singapore at

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Paul Sillitoe at