Commodities

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.

What's the one Asian market witnessing an almost V-shaped recovery? Well done if you guessed Indonesia.

For almost 15 straight months, optimism had been waning in the coal, bauxite, nickel and palm-oil exporting nation, as a free fall in global commodity prices eroded corporate profitability and shone an unflattering light on the balance sheets of companies including Bumi Resources and Alumindo Light Metal Industry, both of which would have to surrender 19 years of their current annual operating profits to repay debt.

This year, though, things are on the mend. A 12 percent rise in the Jakarta Composite Index has made Indonesia the second best-performing stock market in Asia after Thailand in dollar terms. More importantly, equity analysts seem to be suspending their disbelief and catching up with investor sentiment:

Hope Spikes
Consensus one-year forward EPS estimates for the Jakarta Composite Index have surged
Source: Bloomberg

What's causing stock watchers to change their minds so swiftly?

The two-word answer is, Bank Indonesia. On April 15, the central bank delivered a 100 basis-point rate cut by stealth when it announced its decision to switch to a new benchmark for monetary policy from August. Almost instantly, analysts began raising their forecasts for company earnings. Stocks linked to discretionary consumer spending were among the biggest beneficiaries. Gudang Garam, the second-biggest publicly traded cigarette maker, had analysts bump its profit forecast up by 3 percent. Garuda, the national carrier, witnessed a 10 percent upgrade, while Matahari Department Store and noodle maker Indofood, too, saw expectations firm.  

Even the squeeze on balance sheets seems to be easing. The average default risk of sub-investment-grade issuers has narrowed by 35 percent from its peak earlier this year, according to a Bloomberg metric. The export outlook is still bleak, but companies like coal miner Tambang Batubara Bukit Asam are selling more of their output at home thanks to rising electricity demand, a clear sign of an improving economy.

Great Expectations
Consensus estimates of one-year-forward earnings have improved most for Indonesia's benchmark index
Source: Bloomberg

At an average of 19 times earnings, Indonesian stocks on the MSCI Asia Pacific ex-Japan Index don't come cheap, especially compared with those in Taiwan, China, Hong Kong, South Korea and Singapore. But aside from Unilever Indonesia, which trades at 52 times earnings, valuations aren't as rich as they are in India, and President Joko Widodo's infrastructure push is perhaps more compelling in the short run than Indian Prime Minister Narendra Modi's more diffuse reform program.

The one big risk for investors is a collapse in the rupiah, which could make Bank Indonesia's rate cuts unsustainable. So long as that doesn't occur, writing Indonesia off just because it's a commodity exporter might be a mistake.

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

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net