Indonesia and Malaysia are two emerging market countries showing remarkable resilience in the face of worsening investor sentiment in the region.
That is the view of blockbuster bond manager Michael Hasenstab, Franklin Templeton’s chief investment officer for Global Macro.
Hasenstab, speaking in a summer update, said the investment climate in Malaysia and Indonesia was far from ideal but better than the situation in other emerging market countries. He previously championed Indonesia as a former 'crisis state' showing strong turnaround potential.
‘In Malaysia’s case they took the downward move in commodity prices to make some changes, some significant changes in subsidies which puts them on a more stable fiscal path.'
'They were a major exporter of commodities, it is a major component of their exports, but despite that collapse in commodity prices they are still running a current account surplus,’ Hasenstab said.
Hasenstab added, while Indonesia had a small current account deficit, this was offset by foreign investment flows. Both Malaysia and Indonesia had managed to grow around 5% despite the slowdown in the Chinese economy and the commodity price collapse.
‘They have been able to stand on their own two feet and move forward. Both of those, things are not perfect, they are certainly not a ten out of ten, but they are in certainly in positive territory and well anchored there,’ he said.
In terms of allocation, Indonesia makes up 7.91% of the Templeton Emerging Markets Bond fund, which Hasenstab co-manages with Laura Burakreis. It is the fund’s third largest country holding after Brazil at 15.26% and Ukraine at 9.22%.
Indonesian government debt makes up 6.06%, while Malaysian government bonds are the tenth largest holding in the fund at 2.07%. Meanwhile, Hasenstab devotes 13.33% of the currency allocation in the fund to the Malaysian ringgit.
Hasenstab said after the Asian financial crisis, the two countries had taken measures to prevent monetary crisis. He said Indonesia has strict rules in place which means that fiscal deficit cannot rise to more than 3%.
‘What drives the strength and resilience of places like Indonesia and Malaysia a lot of it has to do with the lessons learned from the Asian financial crisis, the move to flexible exchange rates away from pegged exchange rates, the move to establish independent central banks, the move to establish prudent fiscal policy.’
Over the three year period to the end of July 2016, the Templeton Emerging Markets Bond fund lost 3.29% in US dollar terms. This compares to a drop of 3.03% by its Citywire–assigned benchmark, the Barclays EM Local Cur Govt-10% Country Cap TR US.