Indonesia's Equities: A Strategic Buy for EM Exposure Amid Attractive Valuations and Policy-Driven Growth

In a global investment landscape marked by geopolitical tensions and uneven monetary policy normalization, emerging markets (EMs) remain a double-edged sword. Yet, within this volatility, Indonesia's equities stand out as a compelling case for risk-balanced EM exposure. Nomura Holdings Inc.'s recent upgrade of Indonesian equities to "overweight" for 2025 underscores a strategic shift, driven by attractive valuations, a supportive domestic policy environment, and structural growth opportunities. This analysis argues that Indonesia's equities offer a unique confluence of near-term resilience and long-term potential, even as broader EM vulnerabilities persist.

Nomura's Upgrade: Valuations, Policy, and Sectoral Strength

Nomura's rationale for upgrading Indonesia to overweight hinges on three pillars: undervalued assets, easing policy concerns, and sector-specific momentum. The firm highlights that Indonesian equities trade at a discount to regional peers, with the Jakarta Composite Index (JCI) trading at a price-to-earnings (P/E) ratio of 12x, significantly below the MSCI EM average of 16x. This valuation gap reflects lingering skepticism about the country's fiscal credibility and central bank independence-concerns that have since abated. Bank Indonesia's (BI) interest rate-cut cycle, now at 4.75% as of October 2025, has bolstered domestic liquidity, while fiscal reforms have improved investor confidence.

Sectorally, Nomura singles out quality private banks and select consumer stocks as key beneficiaries of this environment. Private banks, such as Bank Mandiri and BRI, are poised to capitalize on a growing middle class and digital banking adoption, while consumer stocks stand to gain from a rebound in domestic demand. These insights align with broader trends in Asian markets, where active management can exploit under-coverage by traditional analysts-41% of ASEAN stocks remain uncovered, creating opportunities for alpha generation.

Growth Policy Momentum: FX Flexibility and Structural Reforms

Indonesia's 2025 growth trajectory is underpinned by a balanced approach to foreign exchange (FX) policy and structural reforms. The IMF's recent Article IV mission noted that Indonesia's economy is projected to grow at 5.0% in 2025 and 5.1% in 2026, supported by fiscal and monetary policies that anchor inflation within the 1.5–3.5% target range. Bank Indonesia's strategy of exchange rate flexibility, combined with targeted FX interventions, has stabilized the rupiah amid global volatility. By October 2025, foreign exchange reserves stood at USD148.7 billion, providing a buffer against external shocks.

Structural reforms further reinforce this momentum. The government's focus on reducing non-tariff barriers and negotiating trade agreements with the EU, Canada, and the U.S. align with its "Golden Vision" of becoming a high-income country by 2045. Initiatives like the Daya Anagata Nusantara (Danantara) program aim to attract private investment in manufacturing, agriculture, and energy, sectors critical to long-term growth. Meanwhile, downstreaming in resource-based industries and infrastructure investments-roads, ports, and digital connectivity-are designed to reduce logistical costs and integrate Indonesia into global supply chains according to Oliver Wyman's analysis.

Contrasting with EM Vulnerabilities: A Risk-Balanced Case

While Indonesia's fundamentals are robust, the broader EM landscape remains fraught with risks. The ECB's normalization of monetary policy, for instance, threatens to tighten global capital flows, exposing vulnerabilities in less-resilient markets. Similarly, U.S. tariff hikes and geopolitical tensions have disrupted supply chains, with Southeast Asian economies like Vietnam and Mexico bearing the brunt according to Modern Diplomacy. Indonesia, however, has navigated these challenges through strategic diversification. A 19% U.S. tariff rate, coupled with strengthened rules of origin to prevent Chinese intermediation, has allowed the country to balance trade relationships without overreliance on any single partner.

Political risk assessments also highlight Indonesia's relative resilience. Unlike peers such as Brazil or India, which face acute fiscal pressures, Indonesia's manageable debt levels and strong reserves position it to weather trade volatility. This is not to dismiss risks-China's economic slowdown and global manufacturing slumps could dampen exports-but Indonesia's policy framework provides a buffer.

Conclusion: A Strategic Allocation in a Reflation Narrative

Indonesia's equities represent a strategic allocation for investors seeking EM exposure in a reflationary environment. Nomura's upgrade, supported by attractive valuations and policy-driven growth, highlights the country's ability to navigate macroeconomic headwinds. While broader EM vulnerabilities persist-ECB normalization, U.S. tariffs, and geopolitical tensions-Indonesia's FX flexibility, structural reforms, and sectoral momentum offer a risk-balanced counterpoint. For active investors, the under-coverage of ASEAN markets further enhances the case for Indonesia, where in-depth research can uncover undervalued opportunities.

In a world where global trade dynamics and monetary policy shifts dominate headlines, Indonesia's equities stand as a testament to the power of policy agility and structural resilience. As the IMF and Nomura both affirm, this Southeast Asian giant is not just surviving-it's positioning itself to thrive.