After a week long visit meeting with investors in the USA, we continue to be surprised at the limited extent of institutional investor participation in the Indonesian equity rally this year. Of over 25 fund managers we interacted with, only few had any significant exposure to Indonesian equities currently, which bodes well for the market. The exceptions seemed to be a few (typically long only) investors with a medium to long term outlook holding substantially (2-4x benchmark) overweight positions, and are apparently comfortable in seeking to add more on declines.
Impressed by underlying structural factors: Across the board we think that investors are beginning to appreciate the degree of structural change that Indonesia had seen in the last 3 years, and that the election prognosis meant we could see accelerated development in several fronts due to administrative continuity. Investors were surprised to note the success rate of the 10,000 MW power programme and were interested in evidence presented that development expenditure had accelerated to pre-
Asian crisis levels by higher district level spending.
Looking for entry opportunities: There appeared to be some concern among US investors on the short term outlook for markets in general and we did receive some enquiries on valuations and interest rates. One or two investors raised the question if all the good news was in the price? We thought that the long term changes in Indonesia were still underappreciated and held long term re-rating potential. We think that investors would look forward to wobbles on account of risk-appetite wavering or politics, as they may provide entry points.
Astra, PGAS & Bank Rakyat the focus of most interest: Among stocks and themes, investors were looking for ways to gain exposure to the power sector. There was significant interest in PGAS with investors believing that as the company turned free cash flow positive there could be re-rating opportunity. Astra was featured as part of almost all conversations as well rounded Indonesia exposure. Investors thought that Bank Rakyat’s valuations had eased over the last quarter, and it offered
pure exposure to the domestic suburban economy, and valuations overshadowed the recognition of BCA as a pedigree banking play.
Risks? It appears that the market’s strong performance YTD and valuations is seen by investors as a short term risk. The sustainability of reforms beyond president SBY’s term came up (the fact that we were discussing 2015 is in itself a sign of how far Indonesia has come in the last five years). Investors also asked about risks that could emerge from the areas of corporate governance and inflation.
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