The worst may be over for Indonesia’s markets, according to the country’s biggest mutual fund manager.

The rebound in private consumption seen in the second quarter may keep going as the government maintains support to sustain the momentum, says Irwanti, director and portfolio manager at PT Schroder Investment Management Indonesia. The fund manager, who goes by only one name, expects the rupiah to stabilize, which she says will provide support for foreign investors to return to the country’s stock and bond markets.

Indonesia has suffered in an investor exodus from emerging markets as the United States (US) Federal Reserve raises interest rates, making the US dollar more attractive. Weak economic growth has also weighed on stocks, bonds and the rupiah, which has depreciated 7.9 percent this year, making it the second-worst performing currency in Asia after the Indian rupee. Foreign investors have sold US$6.6 billion of Indonesia’s equities in the past 12 months and US$2.3 billion of its government bonds in the second quarter.

“We are expecting better macroeconomic conditions,” Irwanti, 36, said in an interview.

Bonds over stocks

Irwanti, a graduate of the University of New South Wales in Sydney, says she’s buying debt for starters as a way to express her optimism. She expects stocks to start rising a little later.

“We continue to accumulate bonds when the yield of 10-year debt hits eight percent,” she said. “Equities can follow the gains in bonds, but that is probably something that will happen in the fourth quarter of 2018 or the first half of next year.”

Indonesia’s 10-year bond currently yields slightly more than the eight percent level that Irwanti mentioned. The earnings yield of the Jakarta Composite Index is about five percent.

Irwanti, a 10-year veteran of Schroders Indonesia who joined the money manager after a stint as an equities analyst for Deutsche Bank AG, is betting that the recovery in household consumption will last as the government is expected to continue providing social support before general and presidential elections in April.

Spending recovery

Private consumption, which accounts for more than half the output of Southeast Asia’s biggest economy, saw the fastest quarterly expansion in four years in the second quarter.

The fund manager says consumer stocks, which account for about 20 percent of the Jakarta Composite Index, should benefit if this trend continues.

Irwanti said she likes PT Astra International, the largest listed conglomerate in Indonesia, for its “cheap” valuation. The company trades at 13.1 times estimated earnings, versus a five-year average of 14.6 times and a current multiple of 14.3 times for the benchmark stock gauge.

Retailers and food companies will also benefit from the consumer spending recovery, she said. She gives PT Ramayana Lestari Sentosa, which operates department stores, and PT Mitra Adiperkasa, which operates the Starbucks Corp. and Burger King Worldwide Inc. chains in Indonesia, as examples.

Irwanti and Liny Halim were both appointed directors at the 84.6 trillion-rupiah (US$5.8 billion) fund in May, joining Chief Executive Officer Michael Tjoajadi, 52, Chief Investment Officer Kiekie Boenawan, 56, and Chief Operating Officer Francisco Lautan, 59. The two women are seen by some fund managers as likely to be the next generation of leaders at the company.

But despite her positive assessment of equities, Irwanti says the Jakarta Composite Index will only rise about three percent to five percent from its current level this year as the market started 2018 at an elevated valuation.

“I’m naturally an optimistic person,” Irwanti said. “I always believe there is silver lining in every cloud, but it all comes down to valuation.” - Bloomberg