Garuda Metalindo, an auto components manufacturer, is seeking to raise Rp 257.8 billion ($19 million) from an initial public offering. (Antara Photo/Puspa Perwitasar)

Indonesian Stock Gains Seen by Nomura to Ashmore After Rate Cut


FEBRUARY 18, 2015

Indonesia’s stocks are poised to reclaim their record high as Nomura Holdings and Ashmore Asset Management said the central bank’s first interest-rate cut in three years may benefit banks and homebuilders at the expense of a weaker currency.

Bank Indonesia lowered its reference rate to 7.5 percent from 7.75 percent after local markets closed Tuesday, surprising all 20 economists in a Bloomberg survey who had expected no changes. The Jakarta Composite Index of stocks climbed 0.2 percent before the decision to 5,337.501, or 0.7 percent off the all-time high of set on Feb. 13. The iShares MSCI Indonesia ETF dropped 0.7 percent to $27.52 in New York after the announcement.

Central bank Governor Agus Martowardojo joined a growing number of policy makers from Russia to Canada who have lowered borrowing costs over the past weeks as economic expansion sputters. While the rate cut dims the allure of the rupiah, which is the worst performing major Asian currency this year, Bank Indonesia said the weaker exchange rate boosts exports and helps reduce the current account deficit.

“The rate cut should be positive for equities as it sends a growth-positive signal,” said Mixo Das, an Asia ex-Japan equity strategist at Nomura Holdings in Singapore. “However, this shift of focus away from the current-account deficit to growth could mean pressure on the currency.”

Bullish view

One-month non-deliverable rupiah forwards, which investors use to bet on the currency, fell 0.5 percent, the most in four days, to 12,915 per dollar in New York trading. The rupiah has declined about 3 percent this year, the biggest drop among 12 of the most-traded currencies in the region as the country’s reliance on foreign investment leaves it susceptible to capital outflows.

Indonesia’s stock benchmark has climbed 2.1 percent this year, propelled by gains in trading companies, property developers and financial firms.

Arief Wana, director at Ashmore Asset Management Indonesia, said the rate cut reinforces his positive view on the equities market. Banking, home developers and consumer goods companies will be among the beneficiaries, he said by mobile phone text message on Tuesday.

When the central bank last cut in February 2012, the gauge gained 6 percent in two months.

The rate cut followed reports this month showing the economy expanded last year at the slowest pace since 2009 and inflation cooled in January. It came three months after the central bank raised the reference rate at an unscheduled meeting on Nov. 18 to fend off inflation pressure from higher fuel prices and a weaker exchange rate.

Growth focus

Tuesday’s move suggests that the central bank has shifted its monetary policy away from a ‘currency first’ focus, to a pro-growth stance, which supports the stocks, according to Michael Shaoul, the New York-based chief executive officer of Marketfield Asset Management.

“We would expect the local equity market to greet the news with some enthusiasm” and the currency may test an all-time low, Shaoul wrote in a note. “This time around the currency weakness seems to have been welcomed by local investors.”

The rupiah has been under pressure as Indonesia’s current account remained in deficit for a 13th quarter in the three months through December, the longest run since 1997.

Bond gains

The deficit will probably be 3 percent to 3.1 percent of GDP in 2015, Bank Indonesia Senior Deputy Governor Mirza Adityaswara said Tuesday. That compares with 2.95 percent last year and 3.18 percent in 2013, when the shortfall contributed to a 21 percent plunge in the rupiah, central bank data show.

For bond investors, the rate cut is a boon. Rupiah- denominated bonds rallied Tuesday, sending yields on the securities due in 2025 down six basis points, or 0.06 percentage point, to 7.39 percent, Inter Dealer Market Association data show. The yield has fallen 40 basis points this year.

Overseas investors have pumped Rp 36.24 trillion ($2.8 billion) into Indonesian local-currency debt this year, compared with $548 million into stocks, finance ministry and exchange data show.