Indonesia Bond Allure Intact as Foreigners Shift From Stocks

  • Overseas funds have bought net $9 billion of Indonesian bonds
  • StanChart, ANZ see bonds offering more value to investors

Indonesia Is On Course for Record Inflows

Foreign investors, used to double-digit returns from Indonesian stocks, are suddenly deserting equities in favor of bonds following a sovereign rating upgrade and the central bank’s signal that it’s open to more interest rate cuts to spur growth. 

Overseas funds withdrew more than $2.3 billion from Indonesian equities in the past three months, while investing an additional $9.2 billion in the country’s bonds so far this year, the most since all of 2014, according to data compiled by Bloomberg.

“It seems that funds are flowing to Indonesia’s bonds, especially after the recent rate cut, while stocks had already risen quite significantly amid the global equity rally,” said Takeshi Yokouchi, a senior fund manager in Tokyo at Daiwa SB Investments Ltd. with the equivalent of about $51 billion in assets. “Investors see Indonesia as a positive destination due to its political stability and fundamental improvements, and for bonds, especially with their higher yields, that scenario hasn’t changed.”

Daiwa SB holds more Indonesian bonds and rupiah in its funds than its model portfolio suggests.

Slower-than-expected inflation in August also supports the case for further interest rate cuts, said Tariq Ali, a Singapore-based investment strategist at Standard Chartered Plc. Bank Indonesia saw room for further easing as inflation for this year and in 2018 is likely to remain “manageable,” Assistant Governor Dody Budi Waluyo said on Aug. 27. The central bank cut its benchmark rate to 4.5 percent on Aug. 22, after lowering borrowing costs six times last year.

The yield on Indonesia’s benchmark 10-year government bond rose 1 basis point to 6.58 percent on Thursday after falling nearly 13 basis points in the previous two days.

The Jakarta Composite Index slipped 0.2 percent after rallying nearly 10 percent so far this year and touching an intraday record high on Aug. 24. The measure was valued at 16.5 times of its estimated earnings, ahead of its five-year average of 15.73 times, according to data compiled by Bloomberg. The stock benchmark trades at a 16.6 percent premium to the MSCI Asia Pacific Index.

The $9.2 billion inflows into fixed income assets has helped push the yield of the benchmark 10-year government bond to 6.58 percent, after it reached the lowest since June 2013 on Sept. 5, according to data compiled by Bloomberg. Below are views from investors and analysts on what is driving the market moves:

  • Standard Chartered Plc (Tariq Ali, a Singapore-based investment strategist)
    • Indonesian stocks valuations “are expensive relative to their own history and other Asia ex-Japan peers
    • “Local currency bonds are still attractive amid a combination of a decent yield pick-up, extremely low rupiah volatility and another likely Bank Indonesia rate cut”
  • PT Sinarmas Sekuritas (Jeffrosenberg Tan, head of investment strategy)
    • The implied return from investing in equities is now less than that from bond yields
    • Risks from a “weak” economy will also lure more investors to bonds than equities
    • While the pace of growth in Southeast Asia’s largest economy is forecast at just over 5 percent this year, slower than an average 5.7 percent rate over the past decade, it’s still faster than that of its regional peers
  • Australia & New Zealand Banking Group Ltd. (Jennifer Kusuma, a Singapore-based senior Asia rates strategist)
    • “The current steady state of the economy is supportive of bonds, arguably over stocks”
    • The rally in bonds “could take a breather following August’s strong performance but the trend should remain intact in the medium term”
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