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.