Indonesia stocks surge to 1-year high post election

Markets are rooting for Jokowi: OCBC
Markets are rooting for Jokowi: OCBC

Indonesian stocks jumped more than 2 percent to one-year highs on Thursday, as investors bet on an election win by Jakarta Governor Joko Widodo.

The benchmark Jakarta Stock Exchange Composite index rose as high as 2.8 percent in early trade to 5,166, the highest since May 30, 2013.

Both Jokowi and ex-general Prabowo Subianto have declared themselves the winner after elections on Wednesday based on contradictory "quick count" results in the closest election ever in Southeast Asia's largest economy.

Official results won't be out for another couple of weeks.

Read MoreDo investors care who wins Indonesia's elections?

"A lot of hope is being placed on Jokowi winning the polls and if he does win, that's good news for the stock market at least in the short term," said Vasu Menon, president of wealth management Singapore at OCBC Bank. "He's for reforms and for new order, and promises to bring about greater transparency and that is music to the ears of investors and I think the markets are rooting for Jokowi."

On the other hand, it could be grim for stocks should rival Probowo, who has a more nationalistic agenda, emerge as the victor.

The Indonesian Stock Exchange in Jakarta
Adek Berry | AFP | Getty Images

"The stock market could correct by 5 percent and the currency could see selling pressure because markets and especially foreign investors favor Jokowi," Menon said.

The rupiah also had a strong session on Thursday, trading at a 2-month high against the U.S. dollar at 11,500.

A Prabowo win is expected to weaken markets due to concerns he will introduce protectionist policies in the financial and farm sectors, and launch big debt-funded spending projects.

Read MoreIndonesia votes: 5 things you need to know

Indonesia stocks have had a stellar year so far, surging 20 percent as markets rebounded from the Fed "taper tantrum" that embroiled emerging markets in a rout last year.

The election is key because the next president will lead the economy for the next five years and comes at a time when economic growth has fallen to its lowest level in over four years.

Economists say reforms in education and labor laws including the elimination of energy subsidies are needed to maintain sustained growth and may be key to maintaining the rally in equity markets.

"We continue to believe that actual implementation of reforms rather than political outcome will sustain equity market performance. We remain defensively positioned in Indonesia," Morgan Stanley said in a note.

— By CNBC's Li Anne Wong. Follow her on Twitter @LiAnneCNBC