Indonesian stocks continued to climb strongly after the market opened on Tuesday (31/03). The country’s benchmark Jakarta Composite Index (IHSG) surged nearly one percent. Several external and internal factors are at play here. Firstly, the US Federal Reserve indicated over the past week that it may not raise its key interest rate too soon, leading to investors’ appetite for emerging market assets. Secondly, Chinese policymakers provided room for increased infrastructure spending and monetary stimulus.
After having seen China’s economic growth figure decline to a 25-year low, Chinese policymakers are eager to reverse this trend. The government of the world’s second-largest economy unveiled an ambitious plan to construct a modern Silk Road to Europe and Africa (which requires investments worth between USD $48-64 billion). Moreover, Governor of the People’s Bank of China Zhou Xiaochuan added that the central bank may have room to act (combating deflation) through policies involving interest rates and quantitative measures. This has triggered expectation of further monetary stimulus measures. China’s central bank has already cut its interest rates twice since November 2014, and it loosened regulations on the amount of money lenders must have in reserve.
Expectation of infrastructure spending and further monetary stimulus pushed Chinese stocks to a seven-year high on Monday (30/03), and supported stock markets in the whole Asian region, offsetting concern about the Greek debt situation. The government of Greece is currently presenting its reform programs to its Eurozone creditors.
Internally, Indonesian companies’ 2014 corporate earnings reports have boosted investors’ confidence. For example, Unilever Indonesia (one of the country’s largest consumer goods producers) recorded good earnings in 2014 according to a statement released on Monday (30/03). The company’s net profit rose 7.2 percent (y/y) to IDR 5.7 trillion (USD $438 million), while sales climbed 12 percent (y/y) to IDR 34.5 trillion (USD $2.7 billion), indicating that consumer spending remained strong in 2014 (domestic consumption accounts for about 55 percent of Indonesia’s total economic growth).
Jakarta Composite Index (IHSG):
However, the Indonesian rupiah continued to depreciate against the US dollar on Tuesday (31/03). Based on the Bloomberg Dollar Index, the rupiah was down 0.19 percent to IDR 13,100 per US dollar at 11:48 am local Jakarta time. Most emerging Asian currencies are depreciating against the greenback on today’s trading day after the US National Association of Realtors announced that its seasonally adjusted pending home sales index increased 3.1 percent to 106.9 in February, the highest reading since June 2013. Separately, the US government reported that consumer spending in the world’s largest economy edged up in February following two months of declines.
Meanwhile, market participants are waiting for Indonesia’s March inflation figure, to be released on Wednesday (01/04). After the Indonesian government decided to raise subsidized fuel prices for April, inflation may rise slightly higher than initially expected. In February Indonesian inflation had eased to 6.29 percent (y/y).
However, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.01 percent to IDR 13,084 per US dollar on Tuesday (31/03).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Contrary to the good performance of Indonesian stocks, the performance of the country’s local-currency bonds have changed from being among Asia’s best performers to being the worst amid severe rupiah depreciation (and the region’s lowest real yields harm returns). Indonesia’s sovereign notes have dropped 2 percent in March.