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http://www.ft.com/cm…l#ixzz2e0gkByv7 Indonesia’s decision to follow Brazil’s lead by raising interest rates at an extraordinary central bank meeting on Thursday temporarily took the sting out of the recent market slide, with the rupiah appreciating against the dollar and the stock market closing in the black. But the global emerging market turbulence , which has also hit Brazil, India, South Africa and Turkey, is unlikely to abate until the US Federal Reserve clarifies its plans to curb its quantitative easing programme. Over the next three months, many emerging market investors will be focused on how quickly the Fed withdraws liquidity from global markets, says Melvin Boey, southeast Asia strategist for Bank of America Merrill Lynch. On a longer-term view, investors and companies in Indonesia are starting to adjust to the fact that, as and when the dust settles, they are unlikely to see a return to the heady economic growth of the past five years, which was pumped up by the US liquidity surge and high prices for Indonesian commodities such as coal, palm oil and rubber. For companies, this “new normal” will mean lower profit margins and higher borrowing costs. For investors, the key question is: how much will growth slow and at what level will asset prices start to look attractive again? “A year ago, we still had high expectations for Indonesia but not now,” says one trader at a London investment bank. “Companies earnings are topping out and the country is moving into a slower cycle, with an election coming up next year as well. But there is a price level at which we’d come back in.” Until earlier this year, Indonesia was seen as one of the world’s hottest emerging markets, with a decade of robust economic growth, a large and fast-growing middle class and plentiful natural resources. The euphoria surrounding southeast Asia’s biggest economy sent the prices of Indonesian assets soaring to record levels. But since the value of the rupiah started falling rapidly in May, subsequently losing 10 per cent of its value relative to the dollar, the equity and debt markets have suffered a major sell-off. The benchmark Jakarta Composite index of shares has fallen by more than 20 per cent since May, when it hit an all-time high, having increased in value by 4.5 times since its global financial crisis nadir in November 2008. The yield on Indonesia’s rupiah-denominated, 10-year government bonds has jumped to well over 8 per cent from a record low of 5.2 per cent at the start of this year. “The central bank should have started tightening monetary policy earlier but the debt looks interesting at these levels,” says a fixed income fund manager in New York. The bank increased its main benchmark lending rate by 50 basis points to 7 per cent on Thursday. After such an extended boom, a correction is hardly surprising. But most analysts believe the fundamentals in Indonesia and other emerging markets are changing. Regardless of when the Fed starts “tapering” its stimulus programme, the economy is likely to slow in Indonesia, says Taimur Baig, chief southeast Asia and India economist at Deutsche Bank. He predicts annual GDP growth could ease to “around 5 per cent” rather than “around 6 per cent” in the next few years. Some Indonesian companies such as Mitra Adiperkasa , a large retail group that has been popular with foreign investors, have already warned their profit margins are being squeezed and are scaling back their expansion plans, for the first time since the global financial crisis. And valuations are not obviously cheap. The Indonesian stock market’s 12-month forward price/earnings ratio of 11.9 makes it more expensive than China (8.5), South Korea (8.2) and Thailand (10.6), but cheaper than India (12.5), Singapore (13.1) and Malaysia (14.4). However, operating profit margins in Indonesia remain among the highest in the region, averaging about 20 per cent, compared with 15 per cent in India and 10 per cent in China, according to Herald van der Linde, HSBC’s chief equity strategist for Asia. “Across the region, all countries are seeing margin pressure but in Indonesia, the margins are higher than elsewhere and the speed at which they come down will be slower,” he says. In any further sell-off, Indonesia could also be cushioned relative to other Asian markets by the fact that many international fund managers have already turned underweight on the country, says Mr van der Linde. By contrast, many still have an overweight portfolio position on India, which is suffering from a deeper macroeconomic malaise than Indonesia. Mr Boey of BofA believes some investors are waiting for the right time to start buying stocks that have been sold off unfairly. “The telecommunications and media sectors stand out from a short term perspective because they have seen a big sell-down, despite the fact that their fundamentals will be immune to what is happening right now as they are not affected by the fluctuating rupiah,” he says. But while there are some brave stock pickers, most international investors want to see more concrete action from emerging market governments before they pile back in. “For me to pound my fist on the table about Indonesia, I’d like to see a turning point in the data, like the current account deficit starting to narrow,” says Mr Boey. Continue reading →