Political Review : Investment Strategy ahead of Elections

JAKARTA (TheInsiderStories) – Investors engaging in both portfolio and direct investments are now assessing their strategies on how to surf safely in the political tides and still make handsome gains, as Indonesia enters another election season, starting from regional campaigns to elect governors and regency heads across the nation next year.

Investors do agree that political risk customarily looms large whenever the country holds elections. However, there are still plenty of possibilities and opportunities when it comes to investing in a ‘political year’.

Some investors and business players who have been operating and investing in Indonesia may already be aware and preparing strategies for what to do – how and where to invest. However, there are also those players who are still uncertain and not willing to take too many risks.

For business players, the big challenge is to run the business as usual, to expand or consolidate.

If history is anything to go by, traders need to start getting their act together. A report published by Citigroup Inc. earlier this month provided some insights about the election risks over the next 18 months in 20 countries, which concluded that elections have played a crucial role in the timing of ‘things going wrong’ in emerging markets. Therefore, investors need to have contingency plans to anticipate such situation.

The report noted that the outcomes of votes in countries like South Africa, Colombia and Russia are predictable, but there are tight contests in heavyweights like Brazil and Mexico, which possess the potential to cause bouts of volatility. In addition, Indonesia, Malaysia, and Thailand are exposed to medium contest.

However, during political years, there is nothing more irrational than when a narrative goes wrong, a wide range of opinions erupts, regarding potential market outcomes in a new political environment. The dispersion and polarity of beliefs is perhaps the widest.

Indonesian government officials who are overseeing the country’s financial industry, however, remain optimistic about continuity of finance amid a political year.

Wimboh Santoso, Chairman of Financial Services Authority, believes that the regional elections to elect governors and regency heads across the nation next year should exert limited impact on the country’s banking industry, including lending activities.

He expects the banking sector’s lending growth to record a 10-12 percent increase, reflecting his optimism about the country’s banking and economy in general. As happened in the past, the regional elections would trigger an increase in consumption related to the campaign and other activities.

Wimboh expects disbursed loans should accelerate next year, boosted by strong demand in infrastructure, consumer and corporation sectors.

“Last October, lending growth reached 8.18 per cent on an annual basis, with the gross non-performing loan rate reaching 2.9 per cent. This consolidation trend will likely to continue until 1Q 2018 and after that, we hope to see expansion in both banks’ lending and corporates,” he told TheInsiderStories.

Tito Sulistio, Chairman of the Indonesia Stock Exchange, cited elections held in the past, includes general elections to elect Presidents and Parliamentary members in 2009 & 2014, as well as the Jakarta gubernatorial election early this year. These political agendas have shown ‘neutral impact’ on capital market performance, as reflected in the rise of the Jakarta Composite Index, increased by 14.5 percent so far.

The 10-year government benchmark improved at around 8 per cent. He estimates that the capitalization of the Indonesian capital market will reach Rp7,000 trillion next year.

Sulistio is concerned about capital inflow sustainability this year as capital market benefited from the tax amnesty programs. As result, many investors transferred their assets from deposits to the capital market, thanks to government effort in lowering deposit rates. Thus, regulators keep pushing the inflow of capital through more instruments, including securitization, medium-term notes and other instruments to spur liquidity within the market.

Eric Sugandi, an economist from SKHA Institute for Global Competitiveness, predicts there will be only a limited outflow regarding political risk next year, taking in account external factors such as the Fed’s normalization and US tax policy to reduce income tax, which will trigger more volume to flow into the US Treasury. Even so, Indonesian market assets are not cheap anymore, as they were in 2009, when the yield for benchmark 10 year bonds was still at a double-digit basis point.

“Compared to other emerging markets like Brazil and Mexico, Indonesia is less unpredictable. We have lower inflation rate, as well as better real effective exchange rate (REER) that would lower risks. In addition, we have a good chance to get another investment upgrade from Fitch, which will make market activity more interesting,” he said.

In term of investing in the stock market, analysts said that investors, in particularly conservative ones, are likely opting to choose defensive stocks as these are resilient to any market upheaval. Market players appear to have a common belief that there will always opportunities even in ‘rough seas’, as long as players embrace the proper strategy in seizing opportunities.

Written by Yosi Winosa, email: yosi.winosa@theinsiderstories.com