Indonesian Bonds: an Attractive Investment Instrument ?

Considering the performance over the past five years, returns on Indonesian bonds have been more stable, whereas other instruments (stocks and gold) show a higher degree of volatility (see the table below). Several analysts expect to see an exodus of funds from the banking system into the bond market over the next couple of weeks (bank deposits have become less attractive due to the lower benchmark interest rate; Bank Indonesia cut this rate twice this year, from 7.50 percent to 7.00 percent). For example, Anil Kumar, analyst at Ashmore Asset Management Indonesia, believes investors now seek short-tenor bonds, while pension and insurance funds will seek to invest in the long-tenor state bonds (with a higher return).

Returns on various investment instruments:

 Year  Jakarta Composite Index
     year-on-year growth
 State Bonds²
   yoy growth
 yoy growth
 yoy growth
 2016¹                +5.61%      +5.10%   +18.65%    +4.42%
 2015               -12.39%      -6.39%   -10.70%    +3.35%
 2014               +22.29%      +7.97%    -1.51%    +8.36%
 2013                -0.98%      +8.60%   -28.26%    +8.38%
 2012               +12.94%      +5.39%    -3.60%    +4.30%
 2011                +3.20%      +5.89%   +22.30%    +3.79%

¹ per 4 March 2016
² average yield on 10-year bond (SUN)

Lilis Setiadi, President Director of Batavia Prosperindo Aset Management, also sees a large portion of investors' funds flow to the bond market in the first half of 2016 as other investment instruments are still plagued by a high degree of volatility. Therefore, a big inflow of funds into fixed income funds has been detected. Setiadi also sees great potential in Indonesia's corporate bonds (although these bonds are generally riskier than government bonds). However, investors are advised not just to look at bonds' AAA rating but also to study the fundamental underlying strengths of  the company (does the company have sustainable earnings growth? can it repay debts? does it have a good track-record regarding coupon payments and the pay off of bonds?).

Although the gold price has risen sharply over the past two months, popularity of this commodity could decline in the second half of 2016 as concern about the global economy is gradually easing, particularly now global oil prices seem to experience a rising trend. However, Deddy Yusuf Siregar, analyst at Asia Tradepoint Futures, sees gold at a strong position throughout the year in the range of USD $1,230 - USD $1,300 a troy ounce.

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