Morgan Stanley Cuts Indonesian Stocks to Underweight

Key Takeaway

• Morgan Stanley downgraded Indonesian equities to "underweight" due to fiscal policy concerns and a strong US dollar, impacting market sentiment.
• Rising US yields and currency volatility have led to significant outflows from Indonesian banks, contributing to $4.3 billion in net outflows for Southeast Asia.
• Chinese stocks declined with the CSI 300 Index down 0.9%, driven by weak travel spending and property sector concerns, affecting economic recovery outlooks.

Morgan Stanley Downgrades Indonesia

Morgan Stanley has downgraded its recommendation for Indonesian equities to "underweight" in its Asian and emerging market allocation. The decision stems from concerns over Indonesia's fiscal policy and a stronger US dollar. "We see near-term uncertainty over the direction of future fiscal policy stance as well as some weakness in the FX market amid still high US rates and a firm US dollar outlook," strategists including Daniel Blake wrote in a note dated June 10. The strategists highlighted that President-elect Prabowo Subianto's campaign pledges, such as government provision of lunches and milk for students, could impose a "substantial fiscal burden." Additionally, Indonesia's earnings outlook has deteriorated, further influencing Morgan Stanley's stance.

Impact of Rising US Yields

Rising US yields and currency volatility are posing significant risks to Indonesian equities, particularly affecting highly-liquid blue-chip stocks. According to Bloomberg Intelligence's Sufianti Sufianti, Indonesian banks experienced large outflows in May, with Bank Rakyat Indonesia seeing the weakest foreign appetite since April. The broader Southeast Asian region has also been affected, with currencies declining against the dollar and equities suffering another month of selling by foreign investors. This has resulted in net outflows of $4.3 billion this year, with Indonesia being the hardest hit, followed by Vietnam and Thailand. The region's lack of equity-market liquidity and direct plays in hot themes like AI have driven foreign capital towards tech-heavy markets such as Taiwan and South Korea.

Chinese Stocks Decline

Chinese stocks experienced a decline after traders returned from a long weekend, with the CSI 300 Index of mainland shares closing down 0.9% to its lowest level in over six weeks. A gauge of Hong Kong-listed Chinese shares also fell by as much as 2% before paring some losses. The decline was attributed to weak travel spending and renewed concerns over the property sector, which reinforced worries about the sustainability of China's economic recovery. "The recent weekend holiday didn’t see as strong consumption as the previous May golden week, and weekly property sales are weak though that’s also volatile," said Xin-Yao Ng, director of investment at abrdn. Domestic tourism spending rose 8.1% year-on-year during the extended weekend, but the trend showed weakening momentum compared to other recent short holidays, according to Citigroup Inc.

Street Views

• Daniel Blake, Morgan Stanley (Underweight on Indonesian equities):

  "We see near-term uncertainty over the direction of future fiscal policy stance as well as some weakness in the FX market amid still high US rates and a firm US dollar outlook."