Pui-Wing Tam – That is the message from fund managers as they survey the prospects of the Indonesian market in 1997. While Hong Kong proved to be the most popular regional investment destination at the start of this year, more fund managers are now gaining confidence in Indonesia and are putting the country on their buy lists.

"Foreign funds have been getting back their weightings in Indonesia again," says Barbara Shaw, a fund manager at National Mutual Funds Management (Asia) Ltd. and manager of the National Mutual Indonesian Fund. "Since not much has happened in politics in the last quarter, the market is coming up again."

Indonesia performed strongly in the first five months of 1996, but then political worries began hurting share prices. The June ouster of pro-democracy leader Megawati Sukarnoputri as head of a political party, plus two July events – President Suharto's trip to Germany for a medical checkup and riots rooted in anger over Ms. Megawati's removal – prompted many investors to leave the market. Those who stayed were rewarded by a fourth-quarter rally, which lifted the Jakarta composite index 24% for the year. The index closed Wednesday at record high of 686.11, up 5.23 points.

May Elections

Political jitters are likely to reappear later this year, warn many fund managers, especially after the first quarter. Parliamentary elections, in which Ms. Megawati has been barred from any role, are scheduled for May. The campaign will cause some jitters, as will continued uncertainty about who will succeed 75-year-old President Suharto. His current five-year term ends in March 1998 and, if health permits, he is widely expected to seek a seventh term.

But should these political fears turn fund managers away from Indonesia? Mac Overton, a fund manager at Mbf Unit Trust Managers Ltd. and manager of the MBf Indonesian Growth Fund, argues that the political risks are already priced into the market. "You should buy into Indonesia now," he says.

The market is currently underpinned by a solid fundamental economic picture. Kitty Hon, an analyst at ImPac Asset Management (HK) Ltd., forecasts Indonesia's economic growth will hit 8.1% this year, up from the projected 7.5% in 1996. And export growth is likely to reach 14.4% this year, up from an estimated 9.7% last year, she says.

Meanwhile, inflation should slow to 7.3%, from 9.4% in 1995, creating a positive environment for lower interest rates, the managers contend. Currently, Indonesia's prime interest rate is 18%.

The positive environment is also expected to fuel corporate earnings growth this year. Ms. Hon predicts average earnings growth will be 20% this year, and 17% in 1998, compared with about 14% in 1996.

'My Favorite Market'

In addition, the Indonesian market is trading at a relatively low price/earnings ratio. "Indonesia is my favorite market in Asia because it's one of the few markets where the price/earnings ratio is lower than the projected earnings growth rate," says MBf's Mr. Overton, who calculates the market is currently at 14.2 times projected 1997 earnings.

Even the perennial problem that many fund managers complain about in Indonesia – limited liquidity – is being alleviated, they say. Simon Chan, manager of the Barclays Indonesia Fund and a fund manager at Barclays Global Investors Hong Kong Ltd., says that the participation of local investors in the market has increased over the past year. Brokerage firms such as PT Lippo Securities, for instance, are offering brokers commissions to develop their retail business.

"We see the market is now not only focused on the blue-chips," says Mr. Chan. "The mix and liquidity in the market has improved."

Fund managers with dedicated Indonesian equity funds are most heavily allocated in the banking and finance sector. MBf's Mr. Overton says the banks are trading at a cheap price/earnings ratio of 12.9 times projected 1997 earnings. Banks' average earnings growth is expected be around 19% this year. While the bigger banks are generally favored, some midsized ones also are displaying impressive growth, say fund managers. Among the top choices are Bank Internasional Indonesia, which Mr. Overton predicts will produce 23% earnings growth this year, while trading at just 13 times projected 1997 earnings; and Bank Tiara, which is forecast to achieve 23% earnings growth. Its share are currently trading at 8.9 times projected 1997 earnings. In trading Wednesday on the Jakarta Stock Exchange, Bank Internasional closed at 1,800 rupiah (76 U.S. cents), down 25 rupiah, while Bank Tiara settled at 3,000 rupiah, up 50 rupiah.