Why These Top Investors Are Pouncing on Indonesian Debt

Updated on
  • Aviva boosted holdings during recent pullback, Ritson says
  • Record inflows make bond market vulnerable, State Street warns

Indonesian bonds are attractive for Aviva Investors as their recent slide has uncovered value. Aberdeen Standard Investments says any further losses would convince it to buy too.

Bonds in Southeast Asia’s biggest economy have fallen this month as overseas investors cut holdings and the Federal Reserve’s intention to keep raising U.S. interest rates undermined the allure of emerging-market assets. Still, they remain Asia’s top performer this year as the government’s economic reforms gained traction and investors seek higher yields.

“We remain very positive on the fundamental backdrop,” said Stuart Ritson, Singapore-based head of Asian rates and foreign exchange at Aviva Investors, which oversees more than $437 billion. Aviva has already increased its holdings in Indonesia’s bonds and will continue to do so, he said.

Bank Indonesia will probably cut rates once more next year to spur growth given subdued inflation, which will help boost bond prices, Ritson said. The central bank has trimmed borrowing costs eight times since last year, most recently in August and September. Inflation has remained within its 3 percent to 5 percent target, allowing the central bank to ease policy.

Indonesia’s success in taming consumer prices provides room for lower rates, President Joko Widodo said, while making it clear it was the job of the central bank to determine whether to cut.

Yields on Indonesia’s benchmark 10-year bonds have dropped to 6.55 percent from almost 8 percent at the start of this year. Still, they have ticked up from a four-year low of 6.26 percent in September.

Skeptics point out that near-record bond inflows have made Indonesia’s debt among the most vulnerable to a shift in global risk appetite.

If President Donald Trump chooses a hawkish candidate to head the Federal Reserve, it could put further pressure on foreign holdings of local-currency bonds and weigh on the rupiah, said Vaninder Singh, a Singapore-based economist at NatWest Markets, part of Royal Bank of Scotland Group Plc.

Overseas ownership of the Indonesia’s bonds climbed to a record of almost 41 percent last month, before falling to 39 percent as the prospect of higher U.S. rates prompted global funds to take profit from this year’s rally. 

Investors are likely to trim their holdings further before the end of the year, according to State Street Global Advisors, which oversees about $2.6 trillion.

“Looking at where the yields are trading from the start of the year till now, it’s a very big move,” said Ng Kheng Siang, Asia Pacific head of fixed income at the firm whose index funds hold neutral positions against benchmarks. “If BI were to do another rate cut and they think that it’s the last, then any rally is not going to be much.”

Aberdeen isn’t overly concerned about foreign selling.

“The fundamentals aren’t changing, the domestic policy considerations aren’t changing, but if foreigners are selling because they’re worried about the Fed tightening policy, then that would be an opportunity to add to Indonesia,” said Adam McCabe, head of Asian fixed income in Singapore at Aberdeen, which oversees the equivalent of about $770 billion. “I’d be keeping the powder dry and ready to go in Indonesia.”

“If you look beyond the very near term into the six-to-12 month investment horizon it looks like there’s a bias to ease rather than raise rates at this point,” he said.

Bank Indonesia is set to keep its benchmark rate at 4.25 percent on Thursday, according to all 16 economists surveyed by Bloomberg.

The economy is well placed to withstand capital outflows, with foreign reserves surging to a record $129 billion in September.

“They have the ability, should market sentiment turn significantly, to suppress currency volatility,” said Ritson at Aviva Investors. “That is not our base case, but there is some reduced fragility around that.”

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