Indonesian stocks continue to expand into record high territory. On Wednesday (05/04) Indonesia's benchmark Jakarta Composite Index gained 0.45 percent to close at 5,676.98 points, a fresh new record high position. Indonesia's main stock index is currently "hot" due to several internal and external factors. However, a new report released by Morgan Stanley may make investors a bit cautious as valuations for Indonesian stocks have been rising sharply recently.
Most Asian stocks rose on Wednesday (05/04), led by Chinese shares that jumped on the back of the government's decision to establish a new economic zone (in Hebei), even though part of the investor community is in a wait and see mode after hearing the news of a new ballistic missile being fired by North Korea into the Sea of Japan. Some investors may also cautious ahead of the release of the Federal Reserve minutes and the US-China summit that is set to start on Thursday (06/04).
Asian stocks also got some support from rising US stocks overnight with the Dow Jones Industrial Average inching up 0.2 percent, while the Nasdaq Composite and the S&P 500 edged up around 0.1 percent, each. Rising US shares, led by energy and manufacturing stocks, came on the back of higher crude oil prices (rising to a near one-month high) and economic reports on trade balance and factory orders that paint a positive picture of the US economy.
With regard to the performance of Indonesian stocks, lets first take a look at the external context. Indonesian stocks have been on the way up since the US Federal Reserve decided to raise its Fed Funds Rate at the policy meeting on 14-15 March 2017. Such monetary tightening in the world's top economy should actually encourage capital outflows from emerging markets, including Indonesia, toward the USA. However, besides this rate hike being priced in (as basically all market participants expected the move at the March policy meeting), the Fed released a rather dovish outlook after the March meeting, implying there remains more time for investors to seek higher yielding assets (risk appetite mode on). Indonesia benefits from this.
In the first quarter of 2017 foreign investors invested a net USD $626 million into Indonesian equities, with more than half of the amount coming on the days following the Federal Reserve's latest rate hike. However, Morgan Stanley warned of elevated valuations of Indonesian stocks and stated that it remains "on the sidelines" with regard to the performance of the benchmark Jakarta Composite Index in the period ahead. Some listed Indonesian companies still favored by Morgan Stanley are Astra International, United Tractors, Bank Central Asia (BCA), Telekomunikasi Indonesia, and Link Net.
Besides the risk of profit taking, some near-term challenges for Indonesian stocks could be the result of the Jakarta gubernatorial election, the result of the blasphemy case of Jakarta Governor Ahok (both events could destabilize conditions in Indonesia's capital city of Jakarta), and a possible shift of the Federal Reserve into a more hawkish stance if the US economy continues to improve and if there are signs that President Donald Trump can realize specific plans such as infrastructure spending and corporate tax cuts.