Indonesia And India Beckon As The Fed Tapers Without A Fit

A rush of cash out of emerging economies was triggered the last time the Federal Reserve reduced its bond-buying program.

But according to investors, this time things are a bit different since they have placed their faith and money in getting great returns in some of the largest emerging economies of Asia.

In particular, Indonesia is worth mentioning as it has had sustained equity inflows along with a stable currency, and even its famously turbulent bond market has stayed calm for months even while there was chatter and talk about tapering by the Fed till the Fed’s announcement on Wednesday that it would begin reducing purchases.

The current situation is very different from the one in 2013 when hammered bonds and currencies of the emerging markets were impacted severely, which sent the rupiah down around 17 per cent within just five months after the then-Fed Chair Ben Bernanke startled markets by informing the US Congress of a tapering down.  

On this occasion, however, the announcement by the Fed was anticipated much better, and few people were astonished by the announcement on Wednesday.

At the same time, the economic fundamentals in Asia have shifted significantly as there are lesser concerns for inflation and exporters hope to gain from high energy prices, which have made investors much more ready to wager that 2013 will not be repeated.

“We’ve been through 2013 and 2018, and I don’t think it’s the same thing in this rate hiking cycle,” said Howe Chung Wan, head of Asia fixed income at Principal Global Investors in Singapore, who has a selective exposure to emerging markets.

“Sitting out here in Asia, there are other things that are more top of mind for us than the Fed,” he said, such as China’s economy and credit markets and volatile commodity prices, as well as the equities flows supporting Indonesia’s currency.

“Indonesia has benefited a lot from this energy crunch,” said Jessica Tea, investment specialist for the Asia Pacific and Greater China equities at BNP Paribas Wealth Management in Hong Kong.

“We are also seeing a growing middle class and rising household incomes – Indonesia is probably one of our favorite exposures in the region.”

Market mechanics are also a favorable tailwind in a region where small investors’ money keeps pouring into equities.

According to UBS analysts, retail account numbers in Vietnam have increased by about a third since the end of 2019, surpassing three million, helping to propel the benchmark index up 50 percent this year, twice as much as the S&P 500.

Data from the Indonesia Central Securities Depository reveal that the number of stock investors in Indonesia has increased by more than 70% year on year to 6.7 million as of Oct. 19.

Global investors are also circling, seeking for ways to put their money to work in other emerging countries after being alarmed by regulatory crackdowns in China.

To be sure, places like Indonesia remain hazardous and vulnerable to capital flight if low-risk interest rates in the United States increase dramatically. Foreign ownership of national bonds is dwindling, highlighting specific skepticism about the economic forecast, especially given the government’s legal need to decrease its deficit.

“I am worried about the growth prospects because even before the country could recover from the pandemic…Indonesia is entering into a period of strong fiscal consolidation,” said Societe Generale economist Kunal Kundu.

Nonetheless, the promise of a tantrum-free taper continues to attract wagers on currencies and equities, particularly as Chinese markets are bogged down by cautious sentiment.

“The Fed has navigated taper communication without a major upset,” Deutsche Bank analysts wrote in late September.

“Asia’s former fragile five members are also far less fragile,” they added, referring to Indonesia and India, which along with Brazil, South Africa and Turkey were seen in 2013 as especially vulnerable to fickle foreign money flows.

“Our favoured Asian FX trade into year-end is to stay long INR and IDR, against shorts in CNH.”

(Adapted from


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