Mysterious Spending Slump Spurs Flight From Indonesia Stocks

(Bloomberg) -- As Indonesians keep their wallets in their pockets, foreigners are pulling money from a stock market dominated by consumer companies.

Consumer goods companies' second-quarter net income has dropped 31 percent year-on-year, while motorcycle sales, a key barometer in a nation where there's almost one scooter for every three people, fell 29 percent in June from May. Foreign funds responded by selling a net $798 million of local shares last month, even as they kept buying into most other Asian markets.

No one is quite sure why spending has slowed so much, although a rise in religious tension, a decline in private investment and the timing of the Eid-al-Fitr holidays have been cited as reasons. Whether or not the downturn persists will be crucial for a market where many of the biggest companies -- such as auto retailer PT Astra International and noodle maker PT Indofood CBP Sukses Makmur -- are reliant on domestic demand.

“Weaker-than-expected consumer spending was a key reason for the foreign selloff,” said Bharat Joshi, who helps manage $3.5 billion as the head of Indonesian investments at Aberdeen Asset Management Plc in Jakarta. “A rise in valuations hasn't been supported by earnings growth.”

The selloff took place after the Jakarta Composite Index rose 18 percent from late December to a record high on July 3. Even though the gauge has declined 1.8 percent since then, its 12-month price-to-earnings ratio is still around 6 percent above the five-year average. The JCI was little changed as of 9:50 a.m. in Jakarta on Wednesday.

Indofood CBP had its first ever year-on-year drop in sales last quarter, with Chief Executive Officer Anthoni Salim saying last week he remained cautious about the outlook for the rest of the year. A central bank consumer confidence gauge dropped the most in June since mid-2015.

The slowdown has fed through to the share prices of some of the big consumer-focused companies:

• PT Matahari Department Store has fallen 24 percent this quarter
• Chicken processor PT Charoen Pokphand Indonesia dropped 12 percent
• Tobacco company PT Hanjaya Mandala Sampoerna, which has the third biggest weighting on the JCI, lost 12 percent
• Astra International declined 12 percent and Indofood fell 6 percent

PT Bank OCBC NISP President Director Parwati Surjaudaja said she thought politics had played a part in the spending slowdown. Hundreds of thousands of Muslims took to the streets of Jakarta to protest against the incumbent ethnic Chinese, Christian governor, prior to the city's election in April. Basuki Tjahaja Purnama, an ally of President Joko Widodo, lost the vote and was subsequently jailed on blasphemy charges.

Further Correction

“I think politics is one of the key issues,” Surjaudaja said. “People start getting reminded of the nightmare of 1998, that things can happen,” she said, referring to ethnic riots before the downfall of the dictator Suharto.

India's Godrej Consumer Products Ltd., which generates around a seventh of its revenue from Indonesia, had a 26 percent decline in net income from the nation in the three months through June from the previous quarter. Rising food and electricity prices and the timing of Eid al-Fitr holidays, which meant there were 10 percent less trading days during the period, contributed to the weak result, Chief Executive Officer Vivek Gambhir said on a conference call Monday.

Not everyone thinks the spending slowdown has driven the outflows. Indonesia's capital markets have taken a bit longer to stabilize following the conclusion of the tax amnesty earlier this year, said Alan Richardson, investment manager at Samsung Asset Management in Hong Kong. “It's more deferred transmission than a long-term problem, so the future still looks promising.”

Jeffrosenberg Tan, head of strategy at PT Sinarmas Sekuritas in Jakarta, said the spending downturn had been caused by a decline in private investment over the past four years and the failure of a commodity-price rebound to trickle down to the rest of the economy.

“There will be a further correction in the market until investors can see consumer spending has started to bottom out,” he said. This would create a buying opportunity as demand will rebound eventually, he said.

--With assistance from Yudith Ho and Abhishek Vishnoi

To contact the reporter on this story: Harry Suhartono in Jakarta at hsuhartono@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Andrew Janes, Margo Towie