Indonesia

A major slowdown in nominal growth was behind Indonesia’s recent stock underperformance. Dedicated EM equity portfolios should upgrade Indonesian stocks from underweight to neutral. We also recommend a new relative trade: go long Indonesian banks / short EM banks.

ASEAN stocks and currencies will weaken further as these economies face multiple headwinds. Raising policy rates did not stop a sliding currency in the past, it is unlikely to do so now.

Indonesia will not revert to dictatorship. Yet the guardrails against authoritarianism are also constraining the actions of the next government in tackling near term domestic and regional challenges. For long-term positioning, use potential selloff from a “dictatorship scare” to build position as structural outlook for Indonesia is positive due to the China-West divorce and the global energy transition.

Despite very low inflation, Bank Indonesia raised its policy rates last month to support the currency. The strategy did not work before and will not work now. Stay short the rupiah.

The geopolitical backdrop remains negative despite some marginally less negative news. China’s stimulus is not yet large or fast enough to prevent a market riot. Two of our preferred equity regions, ASEAN and Europe, are struggling to outperform. Investors should stay defensive overall.

An unprecedented trade surplus has given Indonesia a rare opportunity to transition into a lower real rates regime. The sustainability of Indonesian stocks outperformance is contingent upon whether the authorities can do so.