* Aberdeen sees govt bonds, consumer stocks drawing cash
* Middle East interest seen in sukuk bonds - hedge fund
* Jakarta stocks rise 1 pct on Thursday
By Charmian Kok
SINGAPORE, Jan 19 Moody's upgrade of
Indonesia's credit status to investment grade is set to spur
capital inflows into the country, with fund managers tipping
that to mainly benefit government bonds and stocks with exposure
to domestic consumption, such as PT Unilever Indonesia Tbk
Moody's Investors Service on Wednesday became the second
credit-ratings agency in just over a month to give
Southeast Asia's biggest economy an investment-grade rating,
paving the way for more fund managers to allocate money to
Most bond funds can only invest in a country if it has
investment-grade ratings from at least two of the three major
agencies -- Moody's, Standard & Poor's and Fitch Ratings.
Moody's now rates Indonesia Baa3 with a stable outlook.
Flows into the country have steadily picked up since the
Fitch upgrade in December. According to fund flows tracker EPFR
Global, inflows into Indonesia-focused equity funds were at
their highest in the week ended January 11 since the third
quarter of 2010.
That is seen accelerating now.
"While many other countries are going in the opposite
direction, Indonesia's upgrade should result in further fund
inflows," said Peter Elston, head of Asia Pacific strategy and
asset allocation at Aberdeen Asset Management.
Aberdeen, which has invested $2.6 billion in Indonesian
equities, is overweight on the country's retail firms.
Elston expects the sector to benefit from its booming
middle class, which Nomura Research projects could expand to
more than 150 million people in the next four years.
"The middle class is where you get the real driving force
for consumption and the industry is at the point where the
middle class is starting to grow very rapidly, making the
retailing sector interesting from an investment perspective,"
His top picks include Unilever Indonesia, PT Bank Permata
Tbk, PT Ace Hardware Indonesia Tbk and PT
Ramayana Lestari Sentosa Tbk.
Reaction to Moody's upgrade was swift. Indonesian stocks
rose, with the benchmark Jakarta's Composite Index
gaining 1.1 percent on Thursday.
The yield on Indonesia's benchmark 10-year government bond
gained 2 basis points on Thursday, but had dropped
30 basis points the previous day.
With a population of 238 million and swelling investment,
Indonesia is set to become one of the world's biggest economies,
rebounding from credit-rating downgrades to junk status during
the Asian financial crisis of 1997/98, when the 32-year rule of
strongman Suharto ended.
Endre Pedersen, executive director of fixed income at
Manulife Asset Management, said investors are focused on
Indonesia's improving fundamentals, such as inflation which
slowed in December for a fourth straight month to the lowest
level since March 2010.
"We should see more investors moving to the long end," he
said. "The rupiah bond trade may be crowded but BI (Bank
Indonesia) has provided relief by stepping in to inject
liquidity. That is a positive."
Manulife Asset Management had $3.4 billion invested in
Indonesia as of the end of September.
Although the Moody's move will boost interest across
Indonesian assets, it is likely to have the most immediate
impact on sovereign bonds.
"The upgrades are related to sovereign ratings, so one would
expect government bonds to see the most inflows," said Elston at
MIDDLE EAST INTEREST
S&P is the only other major agency that has not returned the
country to investment level. The agency rates the country at the
highest non-investment level.
"The interesting area for Indonesia here is the sukuk bonds.
For some Middle East buyers who could not invest earlier because
it was not investment grade, this is a new thing for them, which
is good," said Guan Ong, Principal at Blue Rice Investment
Management, a hedge fund that specialises in fixed income.
Ong, previously Chief Investment Officer at Korea Investment
Corp, also said he expects a greater amount of funds to flow
into Indonesia once S&P lifts its rating on the country.
"That would lift the final barrier (on fund flows and
allocation) for those investors who have mandates but are
prevented from investing because of the restrictions," he said.
Indonesia stocks gained 3.2 percent last year, outperforming
the MSCI Asia Ex-Japan index's 18 percent plunge
and after a 46 percent surge in 2010.
According to JPMorgan, bonds returned 7.7 percent last year,
following 15.4 percent the year before.
Indonesia is also likely to see further credit ratings
upgrades in the next few years, Aberdeen's Elston said, adding
the economy's exposure to commodities makes it less susceptible
to the slowdown seen in Europe and the United States.
"The economy is less manufacturing-oriented but more focused
on primary industries like commodities, which makes it more
linked to what's going on in the region than in the Western
world. That places Indonesia in a much stronger position," he
(Additional reporting by Mark Tay; Editing by Muralikumar