Morgan Stanley Says Cut Indonesia Stocks on Capital Flight Risk

Indonesia’s stock market is the most vulnerable in Southeast Asia to capital flight amid expensive valuations and large holdings by foreign investors, Morgan Stanley said.

The country’s equities were reduced to underweight from equalweight in a report today by Jonathan Garner, the New York-based bank’s head of Asia and emerging-market strategy. PT CIMB Securities Indonesia cut its recommendation on the nation’s stocks two days ago, citing concern that rising fuel prices will spur inflation.

Foreign investors, who bought a net $16 billion of Indonesian shares during the past seven years, have sold about $210 million so far in 2013, data compiled by Bloomberg show. The Jakarta Composite Index is valued at 2.8 times net assets, the highest level among 17 Asia equity measures, even after falling 11 percent from its May 20 peak. The gauge rose 1.3 percent to 4,638.40 as of 10:50 a.m. in Jakarta, after a 3.2 drop yesterday.

“Indonesia is still a relatively overowned country” wrote Garner and his Hong Kong-based colleagues Yang Bai and Pankaj Mataney. The nation “is likely to be the most vulnerable equity market within ASEAN in a sudden stop of capital flows scenario.” Asean refers to the Association of Southeast Asian Nations.

The Jakarta gauge, which has more than doubled during the past four years, tumbled yesterday as foreign money managers sold about $88 million of shares amid speculation Indonesia’s central bank will boost borrowing costs. Policy makers are scheduled to announce an interest-rate decision on July 11.

Volatility Surges

The World Bank cut its 2013 forecast for Indonesian growth to 5.9 percent this month, saying accelerating inflation could hurt domestic demand as exports and investment cool. The government raised domestic fuel prices for the first time since 2008 last month.

Higher energy costs, combined with monetary policy tightening, will probably hit already weakening investment growth and drag economic expansion to 5.7 percent in 2013, according to Credit Suisse Group AG.

The Jakarta gauge’s 30-day historical volatility rose to 33.3 today, highest level since November 2011, according to data compiled by Bloomberg. Price swings have increased amid concern the U.S. Federal Reserve will reduce monetary stimulus that has fueled demand for riskier assets in emerging markets.

CIMB Securities Indonesia, the nation’s most-active brokerage in May by trading volume, lowered its recommendation on Indonesian stocks to neutral from overweight on July 2 and trimmed the year-end target for the Jakarta index to 5,075 from 5,250.

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