Both Countries Elected Reformist Leaders This Year
Updated Nov. 11, 2014 11:45 a.m. ET
Global bond investors are diving into India and losing interest in Indonesia, revealing a split in sentiment regarding two of this year’s most popular emerging markets.
Fund managers have drawn parallels between the countries. Both have elected reformist leaders—Narendra Modi in India and Joko Widodo in Indonesia—attracting billions of dollars in investment cash, the result of optimism that economic growth would charge higher.
But only India has managed to maintain momentum. Investors are pulling back from Indonesia as a result of worries President Joko Widodo will struggle to cut expensive fuel subsidies. His opposition is stronger than previously thought, which could hinder his ability to follow through on election promises.
Strong buying of dollar-denominated Indian bonds has sent prices higher, reducing the yield of the benchmark 10-year bond to 8.2%, the lowest level in 15 months. At the beginning of the year, the yield stood at 8.8%.
In Indonesia, the yield on the 10-year is at 8%, after falling at the beginning of the year, though it has traded in a narrow range since March. By way of comparison, 10-year U.S. Treasury debt is yielding just less than 2.4% and Chinese 10-year government bonds offer 3.6%.
“People in general have more faith in the Indian assets” compared with Indonesia, said Henry Wong, head of Asian fixed income at Deutsche Asset & Wealth Management, which as a group manages $1.24 trillion globally. “Attractiveness or not really depends on the fundamentals of the countries.”
Mr. Wong is holding on to Indian debt because he believes the government there will push through economic overhauls. He has sold some Indonesian government bonds.
Equities tell a similar story. India’s benchmark stock index is up nearly 32% from the beginning of the year and hit a record high last week. Indonesia’s Jakarta Composite Index is up more than 17% over the same period, but has retreated 4.1% from a record high in September.
Despite the gains, both countries are seen as risky. They were at the epicenter of anemerging-market selloff in the second half of last year, after the U.S. Federal Reserve indicated that it might wind down its monetary stimulus, which had channeled cash into the developing world. India and Indonesia were labeled as two of the Fragile Five—countries most vulnerable to outflows of funds because of their large trade deficits.
“A number of factors have kept investors relatively cautious towards Indonesia,” said Ken Akintewe, senior investment manager for Asian fixed income at Aberdeen Asset Management . He said Aberdeen, which manages about $16 billion of Asian fixed-income investments, has sold Indonesian bonds “because we didn’t want exposure to the currency for the time being.”
Mr. Akintewe said India offers a preferable return when investors take into account lower taxes and the slightly better yields on Indian 10-year bonds.
Investors say they are confident Indonesian fuel subsidies will decline, but add that they are holding back on further investment until the cuts occur.
Jamie Grant, head of Asian fixed income at First State Investments, which manages about $53 billion in fixed-income assets, said the investment manager owns fewer bonds than the benchmark index mainly because of a cautious stance toward the fuel-price increase, in addition to currency volatility and political uncertainty. “But as soon as [the subsidy cut] goes through, that’s the opportunity to buy,” he said.
The move to cut subsidies is seen by many investors as more important than Mr. Widodo’s election victory itself, since it will show whether Indonesia is serious about committing to economic changes and rekindling growth.
The economy grew at its slowest pace in five years in the third quarter, data showed last week, and many economists say they expect it to slow even further. Indonesia’s economy—Southeast Asia’s largest—grew 5% from a year earlier, less than economists expected.
For bond investors, the size of the subsidy cut is crucial because of the impact it would have on fuel prices for individuals and businesses. Higher prices would push up inflation and eat into returns on bonds.
“A 3000-rupiah fuel price hike flows straight through to about 1½% on the inflation rate, so we know that’s coming and what that’s going to do is put pressure on the bond yields in the near term,” said Mr. Grant.
He said that the impact on inflation from a fuel-price increase will likely prompt the central bank to raise rates, adding to the potential return for bond investors. “We think that by December there will be an opportunity there,” he said.
original source: http://online.wsj.com/articles/bond-investors-sentiment-on-india-indonesia-diverge-1415711692