Citywire AA-rated Vincent Lagger believes Joko Widodo's closely-contested general election win in Indonesia could still lead to further economic instability in the country.
His comments come in the wake of Indonesia's General Electoral Commission confirming Joko Widodo had won 53.15% of the vote this week.
Lagger, who runs the Julius Baer EF Asia Focus fund alongside Citywire AA-rated Jian Shi Cortesi, said the defeated candidate, former general Prabowo, could still threaten a Constitutional Court appeal on the grounds of alleged 'massive electoral fraud'.
He told Citywire Global a court decision in Prabowo's favour would 'set an unpleasant precedent' for Indonesia's democratic process after years of military rule.
Lagger also said there would also create a high level of uncertainty around the country's institutions and judicial system.
Lagger has particular issues around the fact that Jokowi, as Widodo is known, failed to gain the sweeping electoral mandate many had hoped for and could now face strong resistance to a number of his proposed reforms from the different political factions.
He thinks investors may start to consider many of the country's stocks too expensive, given the uncertain backdrop.
He said: 'My concern remains on the future "governability" of Indonesia as Jokowi fell critically short of a strong foothold in the Parliamentary election of last spring. The PDI-P party with 19% of seats will be one fraction among a much talked about 70% coalition.’
'Given the number of parties involved, and some being political heavyweight groups such as Golkar with 16% of seats, it is quite likely that the government cabinet will be formed out of consensus and political horse-trading rather than following a Jokowi-led list of appointees.’
All eyes on next chapter
Lagger said this is likely to be the most important development for international investors to follow until Jokowi is sworn-in in October.
'Generally, the reform agenda promoted by the Jokowi-Kalla team implies many unpopular measures, most critically within the crucial subsidy program plaguing Indonesia's finances,’ Lagger said.
‘As the opposition boasts 47% of public support and Jokowi's coalition will be at best very heterogeneous, one can reasonably expect that subsidy cuts, labour reforms or anti-corruption campaigns will not sail easily through both parliament and the street. The pace of reforms will remain slow.'
Lagger contrasts Indonesian events with India, where Modi received the green light for sweeping reforms.
Indonesia's current political judicial situation is far from clear and the contrasting image to the Indian situation should push investors to re-assess their willingness to pay a premium for their Indonesian equity holdings.
He said this would be emphasised when they look at the waning growth and increasing macro imbalances in credit and external trading.
Over three years to the end of June 2014, the fund has returned 11% compared to the average Equity - Emerging Markets Asia benchmark return of 8.7% in US dollar terms.