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Morgan Stanley Cautious on Indonesia's High-Flying Stock Market

  • Jakarta Composite Index is at record as inflows continue
  • Foreign investors have rotated from defensives to cyclicals

Morgan Stanley warned of risks to Indonesian earnings growth as foreign investors pile into the country’s equities and help send the Jakarta Composite Index to a record.

While the outlook for the second half of the year is upbeat, elevated valuations are a concern, according to equity strategists Aarti Shah and Sean Gardiner. “We continue to be on the sidelines,” they wrote in a note dated April 4, adding they are 7 percent below consensus on 2017 earnings growth.

Foreign investors plowed a net $626 million into Indonesian equities in the first quarter, with more than half of that coming on March 16 and 17 after the Federal Reserve’s rate hike was accompanied by a relatively dovish outlook. Other reasons for a pickup in inflows, Shah and Gardiner said, were the waning of concerns around the Jakarta governor election and the fact that Indonesian shares had lagged peers.

The MSCI Indonesia Index has gained ground but still trails the comparable indexes for Southeast Asia and emerging markets this year. In the first quarter, its free float foreign ownership rose 15 basis points, helped by $758 million of foreign equity inflows in March, Morgan Stanley said, noting that those investors have switched from defensive into cyclical sectors.

“The rotation seems to be driven by the significant foreign equity inflows in March,” the note said.

Foreigners are now the most overweight in banks in five years, while their underweight stance on resources has faded, Shah and Gardiner said. Foreign investors’ overweight position in telecoms has also been cut to the lowest in five years and utilities and consumption are now more underweight, they said. 

Morgan Stanley’s reservations over this shift are partly reflected in its stock picks, with some cyclical names out of favor despite investor enthusiasm.

Its favored companies are: Astra International, United Tractors, Bank Central Asia, Telekomunikasi Indonesia Persero, and Link Net. The stocks it doesn’t like: Bank Mandiri Persero, Bank Rakyat Indonesia Persero, Semen Indonesia Persero, and Hanjaya Mandala Sampoerna.

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