This week's deadly bomb blast at the luxury JW Marriott hotel in Jakarta, Indonesia, shows that terrorism still remains a potent threat in Asia. The modus operandi was similar to last year's bomb blasts in Bali, where close to 200 people died.
As expected, there has been some knee-jerk selling in both domestic stocks and the rupiah. The Jakarta Composite Index plunged close to 5% and the rupiah dropped to 8,670 against the US dollar in the aftermath of the blast. Regional markets also experienced some selling, especially in the Philippines, where sentiment had already been hit from last week's mutiny.
Risk premiums in Indonesia are bound to rise in the short term, with domestic financial markets vulnerable to further profit taking. In addition, inbound tourism and business plans may be put on hold for the time being. But the incident is not likely to materially affect investor sentiment for an extended period.
WE HAVE BEEN HERE BEFORE
Investing in Indonesia has always carried with it an element of risk and volatility. Just as markets discounted the uncertainty surrounding the overthrow of the Suharto regime in 1998, and again in October 2002 following the Ball attacks, the fallout from the latest bombing will also be factored into share prices.
The latest incident may finally force the Megawati administration into taking a tough stand against terrorism. In many ways, her reticence can be attributed to a lack of concrete knowledge on the extremist factions, as well as a general reluctance to accept US claims that Indonesia is a likely terrorist base.
IT'S ABOUT CHOOSING THE RIGHT COMPANIES
More importantly, the latest bombing reinforces our belief that careful stock selection is essential when investing in Indonesia. We only invest in companies after intensive research and thorough analysis of their balance sheets, and even then only if they seem reasonably priced.
We find the best value in consumer companies, select financial stocks and local subsidiaries of leading multinationals. Examples of these include Sepatu Bata, a shoe manufacturer, Unilever Indonesia, a leading household goods company, Dynaplast, a plastics packaging company and Mustika Ratu, a cosmetics manufacturer. Among the financial stocks we own are Bank NISP and Bank Pan Indonesia.
We believe that making money in Indonesia involves staying committed for the long haul. This is one of the main characteristics of our fund. Indeed, quite a few of our holdings - like Dynaplast and Mustika Ratu - have been held since inception.
IMPACT ON OUR REGIONAL PORTFOLIOS
We expect the Jakarta bombing to have a limited impact on our portfolios. Indonesia has a 3.5% weighting in most of our regional portfolios against the benchmark MSCI AC Asia Pacific ex-Japan weighting of 1.1%. The same applies for our single country fund, which remains defensively positioned with a current dividend yield on the portfolio of 7%. We remain positive on Indonesia's long term economic fundamentals, and are not reducing our weighting in the country as a result of the bombing.
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