DJ If Jokowi Wins a Second Term, Indonesian Market Should Rise -- Barrons.com

By Assif Shameen

With a nearly 16-fold gain, Indonesia has been Asia's best-performing market over the past 20 years through January, far outpacing China and India. The Jakarta Stock Exchange came out on top over 10 and 15 years. Last year, even with a 2% decline, it beat Shanghai's 25% fall and finished second to India's 7% gain.

Indonesia could widen its long-term lead this year.

Among the positives is the likely re-election of President Joko Widodo in some two months. He's a big favorite to win a second term over conservative former army general Prabowo Djojohadikusumo, an ex-son-in-law of the dictator Suharto. The president, known as Jokowi, narrowly defeated him five years ago.

If Jokowi wins, there will be two investment themes that will dominate his second term: rebuilding infrastructure and gaining a bigger share of foreign direct investment in Asia. "Jokowi is a decisive leader committed to boosting GDP growth and competitiveness," says Manu Bhaskaran, director at independent research house Centennial Asia Advisors in Singapore. "In his second term, he is likely to pursue unpopular but necessary policies such as labor market reforms."

Read more: Why Indonesia Is a Haven From Protectionism

The fourth-most-populous country behind China, India, and the U.S., Indonesia's economy grew 5.2% last year, following 5.1% growth in 2017 -- well below India's 7.2% and China's 6.5%. "Indonesia can easily achieve 6% growth over the next few years," argues Bhaskaran, "but it really should be doing better -- 7% or more." Indonesia weathered last year's emerging markets turmoil better than peers in Latin America. "Good monetary policy translated into greater resilience to emerging markets stresses and its fiscal policy has improved," he says.

Focused on winning a second-term, Jokowi has been walking an economic tightrope since the 2016 mayoral election in Jakarta, which the opposition party won. Postelection, Jokowi is likely to move aggressively on tax incentives to woo manufacturers. Indonesia, alongside Vietnam, Thailand, and Malaysia, is seen as a key beneficiary of manufacturers' move from China to cheaper locations amid the U.S.-China trade battle.

Jokowi has helped push through an improved tax holiday for foreign investors in 19 industries. "Previous tax incentives had been too small to make an impact," says Sriyan Pietersz, a strategist for Matthews Asia in Singapore. Taiwanese contract manufacturer Pegatron (ticker: 4938.Taiwan), which makes iPads and HomePods, and Korea's Lotte Chemical (011170.Korea) are among those relocating facilities. "Postelection, we will see more aggressive revision of investment laws to facilitate relocation of manufacturing from China as well as a cut in corporate tax from 25% to about 20% to 22%," he says.

Jakarta's market is priced at a middle range to its history, trading at just over 15 times this year's estimated earnings. Analysts expect corporate earnings to grow 12.5% this year after 10.5% growth last year.

Local consumption is picking up. "The rupiah is strengthening again, which leads to more affordability from a consumer standpoint," says Pietersz. "There is also a 30% increase in social spending for the rural sector and lower income group in this year's budget, which will help consumer spending." U.S. investors can invest in Indonesia through one of many exchange-traded funds like i (EIDO).

Among the most-favored stocks is Astra International (ASII.Indonesia), which owns the country's largest car-distribution network, palm-oil plantations, manufacturing ventures, and a bank. The stock trades at 13.7 times this year's estimated earnings and has a 3% dividend yield. Earnings are likely to grow 20% this year. Most analysts have price targets 20% to 35% higher than its current price of 8,125 rupiah (58 cents).

(END) Dow Jones Newswires

February 08, 2019 13:00 ET (18:00 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.