Brazil? Nuts. Indonesian Stocks Are a Tastier Emerging Dish

(Bloomberg Gadfly) -- Indonesia has long been a hot destination for overseas investors hungry for growth and yield. But as stocks advance to a record, they've gone missing.

Foreigners sold a net $942 million of Indonesian shares this year, even as two interest rate cuts in successive months pushed the Jakarta Stock Exchange Composite Index to within spitting distance of 6,000. The benchmark gauge climbed 0.3 percent to an all-time high of 5,958 on Wednesday morning.

For an explanation, look to Latin America. That's been the magnet for international investors this year. Brazil, for instance, has attracted $3.4 billion of foreign portfolio money so far, on track to outpace the $3.9 billion it drew in 2016. From a globetrotter's perspective, the Ibovespa Index is trading at a more reasonable level: 14.8 times estimated 2017 earnings versus 17.7 times for Jakarta.

In addition, the 2015 taper tantrum -- when Indonesian bond spreads spiked and stocks slumped -- is still fresh in many investors' minds. About 40 percent of government bonds in the Southeast Asian country are owned by foreigners. So if markets suddenly expect a sharp rise in U.S. interest rates, bonds and stocks both suffer as foreign money rushes for the exits.

Case in point: When Donald Trump unexpectedly won the U.S. presidential election last year, prompting U.S. 10-year Treasury yields to jump 11 basis points on Nov. 14, the price of Indonesia's credit default swap climbed far more than India, another member of Asia's so-called Fragile Five.

But today's Indonesia is not the Indonesia of 2015. 

Its corporate credit profile has improved tremendously. S&P Global Ratings, the last of the big three to upgrade the nation, now sees it as a rising star. S&P raised its assessment on 14 Indonesian companies this year, while cutting only three. That's the best upgrade-to-downgrade ratio since 2010. By comparison, the rating agency downgraded 85 companies in Brazil this year, and upgraded only seven. 

Ease of doing business also puts its South American rival in the shade. Indonesia's world competitiveness ranking rose to 36th this year, from 41st in 2016, according to the World Economic Forum, which praised the nation as "one of the top innovators among the emerging economies." Brazil, by comparison, stands at 80th. 

Foreign portfolio investment is often nicknamed hot money, with good reason. It moves fast, but not always in the right direction.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

To contact the author of this story: Shuli Ren in Hong Kong at sren38@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.