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In this byline, senior fund managers James Syme and Paul Wimborne of J O Hambro explain why Indonesian equities are attractive—even as sentiment and currency movements suggest otherwise.
Investing in overseas markets, including emerging markets, involves taking on two separate but related sources of risk and return: the local currency equity return and the currency itself. Although the currency component is often portrayed as only consisting of risk, emerging market currencies often strengthen against investors’ base currencies. Our top-down, country-level investment process explicitly analyses currency risk and opportunity, and the portfolio is constructed with a view to improve equity returns through currency positioning.
The relationship between equity and currency returns in an emerging market is a dynamic one, changing through time and differing between countries. Countries with a high share of exports in the economy (and a high share of export revenues in the equity market) see some local currency company earnings improve with a weaker currency. For emerging markets where domestic demand is predominant, company revenues are more negatively affected by a weaker currency. This is typically the pattern in emerging markets that generally run current account deficits, such as Brazil, South Africa and Indonesia, and is a major driver of these markets tending to have a higher beta to the overall asset class.
The relationship between the two return streams also varies through time. For the higher-beta, current account deficit markets, the correlation between equity market moves and currency moves rises when foreign investors are, in aggregate, investing or divesting from the market. When capital is flowing in, the dual positive returns can be extremely positive, leading to virtuous cycles in an emerging economy and its equity market. When capital flows out, this can lead to sharp, short-term declines in both the equity market and the currency. If these last, they can begin to have a negative impact on the real economy but can also represent an opportunity when equity and currency declines do not reflect underlying fundamentals. We believe that this is where Indonesian equities and the Indonesian Rupiah are following recent moves.
Bloomberg sees 5% GDP growth for Indonesia
Although the first quarter of 2025 generally saw a weaker US Dollar, with emerging currencies such as Brazilian Real and South Africa Rand strengthening against it, the Indonesian Rupiah weakened by 2.8% against the US Dollar, following a decline of 6.6% in the previous quarter. In economic terms, the real effective exchange rate has declined to levels previously seen only during COVID, short-term market sell-offs in 2018 and 2015, the Taper Tantrum of 2013, and the Global Financial Crisis. The Rupiah is clearly pricing in very substantial bad news for the Indonesian economy.
So, does this reflect the underlying fundamentals of the economy and its listed companies? In our view, not at all. Whilst there is some stress around fiscal spending and the government’s decision to create a sovereign wealth fund, expectations for the economy remain robust. Bloomberg consensus expectations for 2025 are for GDP growth of 5.0%, CPI inflation of 2.1%, a current account deficit of 1.0% of GDP and a fiscal deficit of 2.8% of GDP. Policy interest rates were cut from 6.0% to 5.75% in January and are forecast to decline to around 5.25% by the end of the year, and PMI and consumer confidence surveys are strong. And it is important to note that Indonesia’s exposure to US tariffs and a potential global trade war is low, both compared to other emerging markets and to developed markets.
Having a small overweight position in Indonesia was a negative contributor to performance in the first quarter, but we have taken this dual sell-off as an opportunity to increase our exposure. At a time with many global assets showing low volatility, high uncertainty and expensive valuations, we believe that Indonesian equities have been left as a standout opportunity by a sell-off that, to us, looks irrational.
