Indonesia selloff lures R472.5bn Allan Gray to enter the market

A selloff in Indonesian assets that accelerated during the Iran war has created a buying opportunity, prompting a South African money manager with $29 billion in assets to enter the market.

The Jakarta Composite Index is the world’s worst-performing benchmark this year, down more than 35% in dollar terms among the 92 equity indexes tracked by Bloomberg. The selloff has largely been driven by MSCI’s January warning that Indonesia could be downgraded to frontier-market status due to investability concerns and the limited number of shares available.

Authorities have since introduced a series of reforms, which MSCI will review in November. However, market sentiment suffered another setback on Wednesday after S&P Dow Jones Indices signaled the country could eventually lose its emerging-market status if concerns over its equities market persist. Stocks fell 1.3% amid broader weakness across regional markets.

The Indonesia Stock Exchange (IDX) in Jakarta.

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Investors have also been rattled by concerns over fiscal policy, governance, the weakening rupiah and policy predictability under President Prabowo Subianto.

Such “periods of heightened volatility and investor uncertainty present a particularly fertile hunting ground for patient, valuation-driven investors in frontier markets,” Rory Kutisker-Jacobson, a portfolio manager at Allan Gray wrote in a note Tuesday. “These markets are often overlooked or poorly researched by global investors, resulting in significant pricing inefficiencies and, at times, compelling opportunities.”

The Cape Town-based asset manager made its first investment in Indonesia last month in PT Indofood Sukses Makmur, one of the world’s largest makers of instant noodles, and plans others.

“We have increased our focus on the country and written several internal research reports on potential opportunities,” Kutisker-Jacobson said.

“On our estimates, INDF trades on just over five times earnings, which we believe is a good price to pay for a dominant, cash-generative, consumer-facing business,” he said.

The Allan Gray Frontier Markets Equity Fund, co-managed by Kutisker-Jacobson, has returned nearly 9% so far this year. During the quarter, it initiated small positions in Mexico, Poland and Turkey, while trimming its holding in Seplat Energy Plc, which has delivered a strong performance this year on the back of elevated oil prices, he said.

Brent crude prices have retreated following a truce between the US and Iran last month that eased concerns about disruptions to shipments through the Strait of Hormuz, a key energy transit route.

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