Rupiah’s World-Beating Rally Faces Trade Hurdle: Market Reversal

Feb. 18 (Bloomberg) -- Indonesia’s rupiah is set to snap its world-beating gains of the past week, trading patterns suggest, amid concern a clampdown on commodity exports will swing the nation’s trade balance back to the red.

The currency strengthened 3.3 percent in the five days through yesterday to 11,785 per dollar, sending a measure known as its 14-day relative-strength index to 24, the lowest since May 2011. Readings below 30 indicate a turnaround is likely. The rupiah also breached its Bollinger band as it climbed to a three-month high this week, adding to signs the rally may be overstretched.

December’s trade surplus was the biggest in more than two years and helped rein in a current-account deficit that spurred an exodus of funds from Indonesian assets in 2013, when the currency sank 21 percent. The nation banned shipments of unprocessed ore last month to encourage investment in smelters and refineries, a policy that Nomura Holdings Inc. and Bank of Tokyo-Mitsubishi UFJ Ltd. say led to front-loading of exports that distorted trade figures toward the end of last year.

“There’s very little room for the rupiah to gain because it has already strengthened so much,” Leong Sook Mei, the Southeast Asia head of global markets research at Bank of Tokyo-Mitsubishi in Singapore, said in an interview. “The quality of Indonesia’s current-account improvement remains suspect. And of course we still have electoral risk.”

A legislative election is scheduled for April and Indonesians will vote again in July to choose a successor to President Susilo Bambang Yudhoyono, who has led the country since 2004. Joko Widodo, the reform-minded Jakarta governor who is leading in opinion polls, has yet to secure his party’s nomination to run.

Asset Inflows

The rupiah rose as much as 1.4 percent to a three-month high of 11,658 yesterday, according to prices from local banks compiled by Bloomberg. The currency fell 0.5 percent to 11,844 per dollar in Jakarta today, while one-month non-deliverable forwards dropped 0.5 percent to 11,740.

Indonesia’s current-account deficit shrank to 1.98 percent of gross domestic product in the fourth quarter, from 3.8 percent in the previous period, the central bank said Feb. 13.

The gains in the Indonesian exchange rate in the five days through yesterday were the most among some 150 currencies tracked by Bloomberg. Overseas investors have pumped $1.2 billion into the country’s stocks and local-currency bonds this year on the improving economic data.

The country posted a $1.5-billion trade surplus for December on Feb. 3 as exports rose 10.3 percent from a year earlier, more than the median estimate in a Bloomberg survey, which saw a 1.7 percent increase.

Fair Value

Bank Indonesia raised its benchmark interest rate by 1.75 percentage points last year to slow the economy and rein in the current-account shortfall, which ballooned to a record 4.4 percent in the second quarter. The central bank said last week the deficit in the broadest measure of trade would probably be 2.5 percent this year, from 3.26 percent in 2013.

“Because of the front-loading of the ore exports, we don’t think the trade surplus will continue in the first quarter and beyond,” Enrico Tanuwidjaja, a Singapore-based economist at Nomura, said in a phone interview yesterday.

Goldman Sachs Group Inc. estimates “fair value” for the rupiah at around 11,800 per dollar, Singapore-based analyst Mark Tan wrote in a Feb. 12 note. The U.S. bank had forecast the currency to reach that level in 12 months.

A gauge of expected fluctuations in the rupiah is the highest among its Southeast Asian peers. Three-month implied volatility rose 10 basis points, or 0.1 percentage point, to 11.41 percent today. That compares with 7.23 percent for Malaysia’s ringgit and 6.6 percent for Thailand’s baht.

‘High’ Volatility

“Volatility in the rupiah could still be high in the first half,” Dian Ayu Yustina, a Jakarta-based economist at PT Bank Danamon, majority-owned by Singapore’s Temasek Holdings Pte, said in an interview yesterday. “We’re still cautious on the rupiah because the trade surplus could have been distorted.”

After the rupiah’s daily trading range breached the lower end of its Bollinger band in October and the relative-strength index fell past the 30 threshold, the rupiah weakened from that month’s high of 10,930 to a five-year low of 12,285 on Jan. 7.

Developed by John Bollinger in the 1980s, the bands are used by technical analysts to identify the turning point in an asset’s trajectory. The limits represent two standard deviations from the 20-day moving average, implying that the likelihood of a currency moving outside the band is small.

Commodity-Channel Index

The dollar’s 20-day period commodity channel index against the Southeast Asian currency dropped below minus 100 last week, suggesting the dollar was oversold, data compiled by Bloomberg show. The index was minus 126 today.

The rupiah may weaken to around 12,000 per dollar in the short term and trade in a range of 11,500 to 12,000 over the next three months or so, said Koji Fukaya, chief executive officer and currency strategist at FPG Securities Co. in Tokyo.

“I wouldn’t be surprised if the rupiah sees some correction from quite a sharp rally,” he said in a phone interview from Tokyo. “It may be stabilizing overall, but there needs to be technical corrections from time to time.”

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net ; Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net
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BRIC, MINT or CIVETS? Investors suffer acronym anxiety

Goldman Sachs bikin jagoan baru pengganti BRIC, yaitu MINT. Sementara HSBC punya jagoan sendiri, namanya CIVETS. Apapun namanya, baik MINT atau CIVETS, huruf "I" selalu akronim dari INDONESIA... Mantaaap...!!!

BRIC, MINT or CIVETS? Investors suffer acronym anxiety

Mon, Jan 20 09:06 AM EST
By Carolyn Cohn
LONDON (Reuters) - Which investment takes your fancy: BRIC, MINT or CIVETS? For many fund managers seeking the next big thing in emerging markets, the answer is none.

Acronym investment - putting money into small groupings of markets which often have little in common beyond a broad economic concept - is giving way to acronym anxiety.

Former Goldman Sachs economist Jim O'Neill set the ball rolling in 2001 when he created the BRIC family of Brazil, Russia, India and China.

Many of these countries and others lumped together under separate acronyms have, at least until recently, enjoyed turbo-charged economic growth. But investment gains are not guaranteed and underperforming local stock markets have led fund managers to flee what had been fashionable groupings.

Assets under management in BRIC funds fell to 9 billion euros at the end of last year from 21 billion at the end of 2010, according to Lipper data, while assets under management in broader emerging equity funds have grown in that time.

Goldman Sachs's own BRIC fund has lost 20 percent in value over the past three years.

Undaunted, O'Neill has coined a new acronym. In a series on BBC radio this month, he championed the MINT group - Mexico, Indonesia, Nigeria, Turkey - as the next giants after the BRICs. O'Neill stresses that MINT - like BRIC before - is an economic, not an investment, concept and his programs explored each country's problems as well as its potential.

Nevertheless, the appeal of acronym investment is fading. Fund managers say such groupings do not take into account different stages of development of the countries involved and risk sidelining other promising markets. The groupings have also frequently suffered from disappointing performances of their listed companies, the main target of foreign investors.

O'Neill's timing is not ideal. Turkey has been rocked by an investigation into alleged corruption following street protests last summer, while Nigerian politics are in turmoil before elections next year.

Indonesia, along with other emerging economies which are running large current account deficits, is experiencing a flight of investors.

"Mexico, Indonesia, Nigeria and Turkey are all very interesting countries but not much connected beyond the excuse for having an acronym," said Richard Titherington, chief investment officer of emerging equities at JP Morgan Asset Management. Titherington prefers groupings by concepts such as markets where companies offer the highest dividend yields.

Investors in the BRIC countries have already found out the hard way that economic growth may not convert into stock market gains, and some analysts blame problems with corporate governance in markets such as Russia and China.

BRIC markets have underperformed the broader MSCI index of emerging stocks in dollar terms in the past three years, with emerging markets in turn lagging developed markets.

NO MORE CIVETS

In another sign of acronym anxiety, HSBC closed its CIVETS fund last year, leaving no managers tracking another group of emerging markets - Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.

Both the BRIC and MINT groupings focus on demographics - countries which are going to grow rapidly by the middle of the century, due to their young populations.

This is an attraction of frontier economies - those which are at an earlier stage of development than established emerging markets. One such is Nigeria, whose stock market has been an extreme outperformer, doubling in value last year.

But relying exclusively on demographics to make investment decisions is risky, says Andrew Brudenell, frontier fund manager at HSBC Asset Management.

Instead, investors should look at countries with weaker corporate regulation and where relatively low levels of goods and services are available, offering potential for growth.

These factors should produce the best returns on company earnings. "Demographics are definitely one of the (investment) criteria, the others are also criteria," Brudenell said. "We would not necessarily decide MINT are interesting countries to invest in, there are lots of other ones."

Nigeria is at an earlier stage in the development cycle than the others. According to IMF estimates, its per capita gross domestic product (GDP) was about $2,800 last year measured by purchasing power parity. That compares with around $5,000 for Indonesia and more than $15,000 for Mexico and Turkey.

Turkey is the country most out of kilter in stock performance terms. It has been hit by weakness of its currency as foreign investors pulled out before the U.S. Federal Reserve begins scaling back its bond-buying this month, a program that had depressed yields in U.S. markets and encouraged investors to seek higher returns in riskier assets.

The Turkish stock market has underperformed even the BRICs in dollar terms in the last three years. The corruption inquiry, which led to the resignations of government ministers, aggravated the problem.

"Turkey remains a long-term investment opportunity but in the short term remains quite risky," said Mauro Ratto, head of emerging markets at Pioneer Investments.

As with Turkey, investors are wary of political risk in Nigeria before the next year's elections and amid uncertainty over whether President Goodluck Jonathan will run.

Whatever their differences or similarities, the danger with all emerging markets is that their performance is not always dictated by local stories, but by the global economic outlook.

"These countries do not have an independent monetary cycle," said Bill O'Neill, chief UK strategist at UBS Wealth Management. "In these environments, emerging markets do struggle short term."

Jim O'Neill said investors had got the wrong end of the stick by banking on the BRIC. "It is very important for me to emphasize, being Mr. BRIC, that I created the BRIC as an economic concept, not as an investment theme," he said.

The same went for the MINT grouping, said O'Neill. "Each of the four MINT (economies) make up more than 1 percent of the world's GDP, except Nigeria - which has the best potential to make up 1 percent of GDP," he added.

And as always, timing is vital with investing. While Goldman's BRIC fund has fallen in the past three years, it is up 26 percent since its launch almost eight years ago.

"If you invested in the BRICS in 2008 for the first time, you would not be very happy. If you had invested in them in 2000, you would be very happy," he said.

(Additional reporting by Sujata Rao; editing by David Stamp)

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