For those who follow Indonesian stock markets, it is no mystery that the trend have not been encouraging or supportive in the year 2015. Several important stock benchmarks that track equity performance for the region show year-to-date losses of 30% or more, and this has led many investors to steer clear of the emerging markets space until things start to stabilize.
There are a few different reasons for why Indonesian stocks have suffered for most of this year. Perhaps the most important factor has been the steady erosion in Chinese export figures, which ultimately suggest that the underlying economic strength in the region is not nearly as strong as previously thought. The negative sentiment here has spilled over into the peripheral economies in Southeast Asia, and stock values in Indonesia have fallen as a result.
Chart View: iShares MSCI Indonesia ETF
To gain a better sense of where we are now, one of the best metrics is the iShares MSCI Indonesia ETF (NYSE: EIDO), which tracks a broad range of market sectors in the country. Year-to-date performance in the ETF shows declines of more than 33%, and we have seen almost nothing in the way of bullish bounces near the lows. But while this does suggest markets have yet to find solid footing, there is still reason to believe that these bearish declines could start to turn course.
From a macro perspective, many of these reasons stem from the latest policy stance that has been taken by the US Federal Reserve. The latest monetary policy meeting at the Fed was accompanied by a statement expressing concern for potential volatility in the stock market (foreign and domestic) that would be seen if interest rates start rising globally. This was the main justification for the Fed’s decision to hold off on normalizing its interest rate policy and this is something that would bring buyers back into emerging market stocks over the next few months.
So if you are looking for new ways to position in Indonesian stocks, current market levels could be viewed as one of the best buying opportunities that we have seen in the last several years. Even a 50% reversion to the mean would present opportunities for significant profits in these sectors, so the fundamental picture is now starting to realign in ways that would benefit the region as we head into next year. All of this taken in combination bodes well for the space -- and could mark one of the more interesting stock stories moving into the first quarter of 2016.
This column was written by Richard Cox, university teacher in international trade and finance, focusing on lessons in macroeconomics and price behavior in equity markets.