Funds are rushing back into Indonesian shares this week in the wake of the emerging market sell-off, but analysts are divided on whether investors should go with the flow.
Indonesian shares fell by around 9 percent in August, among the worst performers in a broad emerging market sell-off as concerns over the country's current account deficit spurred outflows. However, the archipelago's shares have been regaining lost ground in September, up around 3 percent month to date. The index finished Tuesday up 4 percent.
"There is good reason to revisit Indonesian equities," Herald van der Linde, HSBC's head of equity strategy for Asia Pacific, said in a note. He believes Indonesian policymakers' response to sharp outflows, plunging rupiah and rising inflation were about 70 percent right.
"Indonesian policymakers might have been slow to respond, but the increase in interest rates in recent months has been the appropriate reaction to currency weakness, despite the negative implications this might have for the outlook for growth," he said.
(Read more: Why Indonesia could be worse off than India)
"While growth is likely to slow, we don't expect a significant fall in aggregate demand," he said. He noted that Indonesian households and companies don't carry a lot of debt, suggesting the fallout from higher rates may be contained.
With Indonesian equities at the low end of their trading range of 12-15 times earnings, valuations have overshot on the downside, he said.
Other analysts aren't as sure on valuations. A recent Nomura report noted Indonesian shares are trading at 11.9 times their 12-month forward earnings, compared with their long-term average of 10.5 times. But while Indonesia's price-to-book value ratio is now at a modest discount to its long-term average for the first time since July of 2009, at 3.2 times, it is among the highest in the MSCI AC World universe, Nomura noted.
CIMB isn't expecting Indonesia to see any relief in September.
(Read more: Goldman cuts earnings forecasts for South Asia)
"The equity market has priced in worse-than-current conditions, in our estimate, but the not the worst," suggesting some more downside, albeit limited, CIMB said in a note.
Indonesia's shares are also trading at a 9 percent premium to the MSCI Asia ex-Japan's valuations, it said.
CIMB rates the market at Neutral.
"Timing (three months into the bear market), uncertainties and now a potential Syrian crisis suggest it may be too early to position for a recovery," CIMB said.