An electronic board displaying the Jakarta Composite Index figure is reflected on a glass window inside the Indonesia Stock Exchange (IDX) in Jakarta, Indonesia, on Thursday, Dec. 17, 2015. Stocks and the dollar climbed, while Treasuries clawed back some gains as the first U.S. interest-rate increase in almost a decade was welcomed across Asian markets. Photographer: Dimas Ardian/Bloomberg
© Bloomberg

There was a quiet air of optimism in one of Jakarta’s swankiest rooftop bars this week, where glasses clinked and chat was cheerful as investors from New York to Hong Kong talked up local prospects when they descended on the capital for the annual UBS conference.

Indonesia often struggles to compete with the likes of India and China for investor interest. But even as sentiment towards emerging markets remains wary, the standout performance of Jakarta’s stock market and a new confidence in the government of Southeast Asia’s largest economy is attracting attention.

“Indonesia for 2016 could turn out to be the story India was supposed in 2015,” says Herald van der Linde, Asia equity strategist at HSBC.

Jakarta’s benchmark index has so far this year gained 4.8 per cent, and 9.7 per cent in dollar terms, ranking it among the top 10 performers worldwide. The gains come, too, as Asian stocks have in general been weighed down by fears about China.

The MSCI Asia index, excluding Japan, is down 4 per cent for the year — as are global developed world stocks — compared with a 1 per cent drop for global emerging markets, following the recent rally.

Indonesia’s gains follow a turbulent year, when falling commodity prices dragged growth to below 5 per cent in the resource-rich economy and local groups struggled with a weak local currency. But there are now signs that President Joko Widodo, also known as Jokowi, has been able to galvanise support for promised economic reforms that could revive growth, analysts say.

“Basically, people think that stuff is going to get done — and that will lift growth,” said David Mann, chief economist for Asia at Standard Chartered. “Across the region, countries that look like they’re getting better at doing what they said they’d do are getting noticed.”

Thailand, up 9 per cent in dollar terms, is another where investors are raising growth forecasts. Meanwhile, Singapore — often used a proxy for Southeast Asia’s overall market mood — is down 1.2 per cent.

So far the Jokowi government has rolled out a series of stimulus packages, cutting red tape, and pushing through new infrastructure projects. A 7.3 per cent rise in public spending boosted growth to just above 5 per cent in the past quarter.

The turnround follows a series of highly criticised policy decisions last year, including import duty increases and talk of new language tests for expatriate workers, which earned Jokowi a reputation for creeping protectionism.

“Everyone is bullish on Indonesia now,” says Jahanzeb Naseer at Credit Suisse. “What has changed since last year is that government spending has improved quite a lot and that’s provided a fillip to growth.”

Analysts say a large proportion of those gains are being felt in the consumer sector as major construction projects create jobs for unskilled labour, driving demand for basic consumer goods such as cigarettes, snacks and mobile top-up vouchers.

“You need to go mass market as far as tactics go in Indonesia because that’s where Jokowi’s going,” says Harry Su, head of research at Bahana Securities, the local brokerage. “Jokowi is heading to provide a lot of support for people in the low end through job creation, through infrastructure projects.”

Among the best performing stocks this year is HM Sampoerna, the local affiliate of Philip Morris, which has gained 15 per cent since the beginning of this year to Rp105,500, while Indofood, which produces some of Indonesia’s most popular instant noodles, has gained 34 per cent to Rp7,350.

Mr Naseer adds that an expected increase in advertising expenditure by consumer goods groups is now pushing media stocks higher too. Media Nusantara Citra (MNC), run by tycoon Hary Tanoesoedibjo, for example, has gained 23 per cent in the past month to Rp1,865.

Beyond expansionary fiscal policy, slowing inflation and the prospect of further interest rate cuts are encouraging investor interest. Bank Indonesia has cut the benchmark lending rate to 7 per cent from 7.5 per cent at the beginning of the year, as concerns around the US Federal Reserve’s policy decisions ease and the rupiah stabilises.

Bahana Securities is forecasting further cuts in the coming months that will bring rates down to 6.25 per cent by the end of the year — a process that is not, however, bringing joy to every sector.

Bank stocks would normally benefit from easing rates as improved growth expectations and any corresponding credit boom outweighed the dent to lenders’ profits from lower net interest margins.

Financials have, however, lagged behind overall gains as investors doubt whether lending rates will in fact increase — and even if they did, how profitable new loans will be.

Shares in Bank Rakyat Indonesia have dropped since the start of the year and Bank Central Asia (BCA) has gained less than 2 per cent since Indonesia’s financial regulator announced plans to bring lending rates down to single-digit levels by the end of the year, potentially squeezing net interest margins at major banks.

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