JAKARTA - Indonesia's stock market has outperformed its Asian peers over the past six months on hopes of an earnings boost from President Joko Widodo's long-promised reforms and lower borrowing costs. But foreign investors aren't betting on it.
The apathy shown by foreigners could spell trouble for the market facing off against a surfeit of challenges including plummeting prices for Indonesia's key commodities, a slowdown in key trading partner China and red tape and reactionary politics at home. "There are currently no tailwinds that can help the outlook for stocks since the earnings prospects, with a few exceptions, are not good" said Mark Mobius, executive chairman of the Templeton Emerging Markets Group at Franklin Templeton Investments.
Yet, local investors seem unfazed by the bumpy road ahead and have been buying into equities, encouraged by a flurry of steps taken late last year by Widodo to boost investment and simplify the nation's notoriously complex regulations.
That helped keep losses in Indonesia's main stock index to just 2.6 per cent over the past six months, compared with an almost 18 per cent slide in the MSCI Asia Pacific ex Japan index.
All the same, foreigners remain cautious after the disappointment of Widodo's early promise on reforms. "Unless Jokowi is able to reverse the situation the outlook for Indonesia is not good," Mobius said, referring to the president by his popular name.
Indeed, frustrated by policy confusion and bottlenecks in transportation and investment, foreign investors have voted with their feet. A weak rupiah currency and plummeting prices for Indonesia's key export commodities have added to the economic gloom.
Foreign investors sold a net 2.3 trillion rupiah ($168.62 million) of stocks in January, adding to the 22.6 trillion rupiah of net sales for the whole of 2015.
Free float foreign ownership in MSCI Indonesia fell to 75.7 per cent in the fourth quarter, the lowest since 2008, according to Morgan Stanley data.
Contrast this sentiment with the optimism of local firm Ciptadana Asset Management, which is buying into Indonesia's infrastructure and construction story.
It's not a question of whether to be bullish or bearish, but"how bullish do you want to be," said Andry Taneli, a fund manager with the Jakarta-based firm, who says he believes the worst of the domestic economic downturn is over.
Southeast Asia's largest economy is forecast to have expanded at the slowest pace in six years in 2015, and investors have been disappointed by long delays in infrastructure spending.
To support growth, Bank Indonesia cut its key interest rate by 25 basis point in January for the first time in 11 months, signaling a start of an easing cycle.
Cholis Baidowi, chief investment officer at CIMB Principal Asset Management in Jakarta, who helps manage 5.8 trillion rupiah, said he expects lower borrowing costs to help drive the economy and boost corporate earnings growth by 10 per cent, compared with last year's 13 per cent decline. "Implementation of government infrastructure plan should be much better this year." Baidowi said.
But some in the market, such as Taye Shim, strategist at KDB Daewoo Securities Indonesia, warn that Indonesian stocks have become expensive as local investors are pricing in the best-case scenario.
The MSCI Indonesia index is currently trading at 25 times trailing earnings, a 130 per cent premium to the MSCI emerging market index, Shim said.
That raises the risk of a bruising selloff if the expected economic recovery fails to materialise. "Take a look at the global macro backdrop, I don't think there is a big catalyst to actually push economic growth up," Shim said.