Jakarta. After months of capital outflows, a weakening rupiah and one of the world's worst-performing stock markets, investors are beginning to reassess Indonesia as improving financial conditions and strong demand for Indonesian assets raise hopes that the "Sell Indonesia" narrative may be losing momentum.

The shift in sentiment comes as Indonesia's benchmark Jakarta Composite Index (JCI) rebounds from a steep selloff, while the country's newly established sovereign wealth fund, Danantara Indonesia, attracted more than $4.6 billion in orders for its debut global bond offering, far exceeding expectations.

The "Sell Indonesia" narrative gained traction after Bloomberg reported earlier this month that "the big trade in Asia is 'sell Indonesia'," citing George Boubouras, head of research at K2 Asset Management.

The JCI, which fell to 5,594.7 after the report — its lowest level since the pandemic — has since rebounded above the psychologically important 6,000 mark.

Foreign investors recorded a net purchase of Rp 2.51 trillion ($140 million) across Indonesian markets on Wednesday. However, overseas investors remain net sellers of Rp 67.34 trillion so far this year, although the latest inflows suggest sentiment may be starting to improve.

Read More: Beijing Backs Indonesia’s Yuan-Denominated Bond Issuance: Purbaya

Cheap Valuations Draw Investors Back
"Foreign investors still see Indonesia as having comparative advantages through consistent GDP growth of around 5%, resilient domestic consumption and the continuation of strategic national projects," said Nafan Aji, senior market analyst at Mirae Asset Sekuritas Indonesia.

"Cheap valuations may attract them to enter the market, but solid economic prospects are what make them stay," he added.

The JCI currently trades at a price-to-earnings (P/E) ratio of about 10.2 times, based on estimates as of June 17. That is well below its five-year average of 12.66 times, suggesting Indonesian equities remain cheap despite the recent rebound.

Bank Indonesia reinforced market confidence on Thursday by raising its benchmark interest rate by 25 basis points to 5.75% in a bid to support the rupiah. The move marked the central bank's third rate hike since May, bringing cumulative tightening to 100 basis points. It came after the rupiah depreciated about 7% against the US dollar this year and briefly weakened past Rp 18,000 per dollar, a record low.

Despite the recent stabilization, foreign ownership of Indonesian government bonds remains subdued at around 12.67% of total outstanding debt, equivalent to roughly Rp 872 trillion. The figure is significantly below pre-pandemic levels of more than 35%, highlighting the extent to which foreign participation has declined in recent years.

Danantara Bond Sale Signals Global Confidence
Yet international investors have continued to show appetite for selected Indonesian assets.

Danantara Indonesia recently raised $1.5 billion through its inaugural global bond issuance after attracting approximately $4.6 billion in orders during the book-building process. The sovereign wealth fund had initially planned to raise only $1 billion before increasing the offering size by 50% due to overwhelming demand.

Danantara Chief Executive Officer Rosan Roeslani said the strong response reflected investor confidence in Indonesia's economic outlook and in the fund's role as the country's strategic investment vehicle. Investors from Europe and the Middle East accounted for 41% of allocations in the five-year tranche, followed by US investors at 38% and Asian investors at 21%.

Indonesia is also seeking to diversify its funding sources. Finance Minister Purbaya Yudhi Sadewa traveled to Beijing this week to discuss plans for Indonesia's first sovereign Panda Bond issuance with Chinese Finance Minister Lan Fo'an. The yuan-denominated bonds are expected to broaden Indonesia's investor base and deepen financial cooperation with China.

Recovery Faces Key Tests
Investors are also closely watching MSCI's upcoming market accessibility review later this month, which could influence future capital flows into Indonesian equities and affect the country's standing among global investors.

Still, analysts caution that the market recovery remains fragile. According to Rully Arya Wisnubroto, head of research and chief economist at Mirae Asset Sekuritas Indonesia, the sustainability of the rally will depend largely on the rupiah and government bond yields. If the currency continues to strengthen and yields on 10-year government bonds retreat from recent highs above 7.3%, Indonesia's risk premium could decline further and encourage fresh foreign inflows.

"That condition would create room for foreign funds to return to the bond and stock markets," he said.

Reza Priyambada, director of Reliance Sekuritas Indonesia, welcomed efforts to promote a "Buy Indonesia" narrative but argued that stronger market transparency alone would not be enough to attract sustained foreign investment.

"Foreign investors manage large pools of capital and have many alternatives. Maintaining macroeconomic stability is essential to preserving their confidence."

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