Roaring back to life

From being a problem child to becoming the best-performing Asian share market this year, Indonesia has come a long way in just a few months.

Leading market analysts say Australia's closest neighbour has turned the corner and emerged as one of the top stock-hunting grounds in Asia for investors in 2014. Indonesia, along with Brazil, India, South Africa and Turkey, was part of the ''Fragile Five'', a group of developing economies that investment bank Morgan Stanley said would struggle as the US started to withdraw its unprecedented stimulus program.

The country was badly hit in the second half of 2013. The Indonesia rupiah plunged against the US dollar, Jakarta's stockmarket sank by almost 24 per cent between its peak for the year in May and its trough in August, and analysts fretted over the country's large trade deficit.

But after the large selloffs and following a series of measures that strengthened the local economy - including a rise in interest rates from 5.75 per cent to 7.5 per cent - and a shift from a trade deficit to a surplus, Indonesia has cast aside the doubters. The sharemarket has soared by 22.5 per cent since its August 2013 low. This year, the Jakarta Composite Index has risen by more than 13 per cent to make it the leading sharemarket in Asia.

The rupiah, which was one of the world's worst-performing currencies against the US dollar after shedding more than 20 per cent of its value last year, has been the second-strongest currency against the greenback this year with an increase of 7.6 per cent.

And the south-east Asian nation posted a larger-than-expected trade surplus of $US790 million in February, following a $US440 million deficit in January, as imports fell.

In March, foreign investors added a further $US1.3 billion to local equities, after a net inflow of $US658 million in February.

Meanwhile, Bank Indonesia, the country's central bank, has kept interest rates on hold after lifting it by 175 basis points between July and November last year.

''Our economists are confident that Indonesia is now in a better shape to overcome a more challenging situation ahead,'' Credit Suisse's Indonesia analysts said in a February note.

Bolstering the positive outlook is the frontrunner for Indonesia's presidential elections in July, Jakarta's Governor Joko Widodo.

Mr Widodo, who is popularly known as Jokowi, has run on a platform of anti-corruption and is well-respected for his economic policies. Investors cheered - with the Jakarta Composite Index surging by more than 3 per cent - the day he was announced as a presidential candidate.

''That's something that's instilling a lot of confidence both domestically and internationally as well,'' BlackRock portfolio manager Joshua Crabb said.

''If we continue to see these improving trends … that will be a backdrop for a positive outlook for the economy.''

In February, JPMorgan upgraded shares in Indonesia to overweight, saying the country's economy was ''proving adaptive and resilient faced with tapering''.

''We expect the market and the currency to continue to be driven by declining perception of tail risk,'' JPMorgan's chief emerging market and Asian equity strategist Adrian Mowat said.

Mr Mowat recommended investors revisit large cyclical sectors in Indonesia, such as materials, consumer discretionary and industries.

Credit Suisse analysts said in February their preferred allocation shifts were from consumer staples to discretionaries, from utilities and telecommunications to banks, as well as a small out-of-the-index allocation of coal stocks, which they said had expectations that were too low.

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