Threadneedle: Indonesian elections results

Rafael Polatinsky, Asian equities fund manager, comments on the outcome of the elections and how it will impact markets: The expected first-round victory for President Yudhoyono is a very positive development for the Indonesian market. President Yudhoyono has made great strides in addressing some of the structural problems that have prevented Indonesia reaching its full growth potential, such as bureaucracy and corruption, and investors are hopeful that his re-election could provide additional catalyst for the re-rating of the Indonesian market, and a platform to boost GDP growth rates to Chinese and Indian levels.

Indonesia offers investors an attractive investment opportunity given its vast, under-penetrated population, a diverse, domestically-focussed economy, and exposure to rising commodity prices. Similar to the Indian and Chinese markets, Indonesia offers exposure to the growing spending power of the Asian consumer, as well as exposure to the rising infrastructure spend needed to drive growth. Relatively insulated from the global slowdown, the economy delivered GDP growth of over 4% in the 1Q09 amongst the best in the world, and the currency has remained stable even while interest rates have been slashed in response to falling inflation. Consumer confidence is at a two-year high. A stable government with a clear mandate for reform can provide a platform for a permanent reassessment by foreign investors of the high risk premiums normally associated with Indonesia.

Even after the recent rally, current valuations of 13x 2009 earnings falling to 12x forecast earnings in 2010, are not expensive relative to other Asian markets and relative to its own five-year history, especially given the strong medium-term growth prospects. As a relatively high beta market Indonesia will remain vulnerable to changes in global risk appetite, but assuming stability in the global macro backdrop there is considerable scope for a positive re-rating of the stock market.