She noted in a report that the change of government and the policy announcements have led to some re-rating of the overall valuations of the Indonesian equity market.
‘However, we still see value from potential positive revision ratios in earnings-per-share and reasonable price-to-book valuations in several sectors,’ said Shekhar.
According to the Singapore-based manager, Indonesia has the powerful combination of high savings and investment ratios, which are both key for sustained economic growth.
‘The Jokowi government has launched a variety of infrastructure programs spanning roads (2000 km), ports (10 new air and sea ports each), industrial estates, traditional markets, dams, technology parks, et cetera.
‘We have seen government infrastructure spend pick up sharply in the last few quarters. State-owned enterprises have also seen growing order books. This further underpins our medium-term investment thesis.’
Key cyclical driversThe Indonesian economy was hit by the commodity cycle downturn in 2013 and it has been through a period of deceleration in growth and market performance.
Additionally, the change of government and tax vigilance had suppressed spending in property, vehicles and other big ticket consumption for several quarters, according to the manager.
‘This, in our opinion, further exacerbated the economic downturn in the country.
‘Finally, the intervention in interest spreads of banks led to further weakness in the banking sector, which was already reeling under asset quality pressures. We believe these events have created strong opportunities for investors.’
Positive policy reformsOn the policy front, Indonesia is constitutionally bound to contain its fiscal deficit to 3%. This makes it challenging for the government to stimulate a decelerating economy through fiscal spending.
However, recent policies are an impressive attempt to overcome this constraint.
Shekhar says she sees several positive policy reforms: ‘Firstly, fuel and electricity subsidies were dramatically reduced last year, easing government deficits.
‘The Tax Amnesty scheme was recently passed, aimed at legitimising years of undisclosed domestic and foreign wealth, spurring collections and improving tax compliance.
‘We are even more excited about the medium- to long-term benefits of the tax amnesty scheme from (1) a pick-up in discretionary consumption (such as automobiles, property, durables, etc.) in the medium term; and (2) a broadening of the tax net that would increase the government’s fiscal fire power.'Furthermore, on the back of the above, she says the government has announced a vast array of infrastructure projects to improve supply side bottlenecks and stimulate economic activity.
Finally, the Financial Services Authority of Indonesia is attempting to moderate lending rates to corporates in an effort to stimulate borrowings and capex.