Jakarta’s gain of 3.2% and return to investment grade makes Indonesia the standout among Asian peers for 2011. An accommodative monetary policy and strengthening credit environment should drive the economy into 2012 and warrant an overweight position in the emerging Asia portion of portfolios.
Fitch applauded Indonesia’s improved balance sheet a few weeks ago.
Moody’s and S&P still place the country in the top non-investment grade rating — at Ba1 and BB+, respectively — but an upgrade may be following.
Meanwhile, the Indonesian economy is relatively insulated from foreign markets and consumer demand — a key driver of activity — remains resilient.
The credit upgrade came as a result of the country’s strong fundamentals. Indonesia has a small current account surplus and public sector deficit of less than 2% of GDP. Inflation has been moderating but remains high relative to others.
The central bank cut rates twice, by 75 basis points, toward the end of the year and may cut further against a weaker economic environment. Despite an aggressive policy by the central bank, the rupiah may be supported by foreign capital inflows on higher credit ratings.
Market Vectors Indonesia Index (NYSEARCA:IDX) holds 87.1% of assets in Indonesian companies and the remaining allocation in companies deriving more than 50% of their revenue from the country.
The fund holds 38 stocks and is fairly concentrated in financial services (26.3%), consumer goods (26.1%), basic materials (22.8%) and telecommunications (8.1%). The fund managed to post an increase of about 1.0% over the last twelve months and currently trades for 14.0 times trailing earnings.