Indonesia's currency has dropped sharply amid an emerging market sell-off, but there are signs it won't derail the country's strong consumer story, as companies come up with new ways to cope with a weaker rupiah.
"Conventional wisdom has it that consumer companies are likely to suffer margin compression as a result of rupiah depreciation, given that 70-80 percent of their costs are linked to the U.S. dollar and imported materials," noted Stevanus Juanda, an analyst at UOB KayHian, said in a note last week.
But historically, "currency depreciation has made little impact on yearly profit" in Indonesia, he said. "Consumer companies have strong pricing power and can pass on cost increases resulting from higher raw material costs or rupiah depreciation."
The rupiah has certainly seen substantial depreciation, falling around 18 percent since the beginning of this year, touching its lowest levels since the Asian Financial Crisis in 1997-1998. Market turmoil over expectations the U.S. Federal Reserve will soon raise its benchmark interest rates for the first time in nine years has spurred outflows from emerging markets.
But Stevanus has initiated coverage of Indonesia's consumer stocks at overweight, citing data from consultancy McKinsey that estimates the country's consumer class could grow to 85 million people by 2020 from 45 million in 2010, fuelled by an expanding working class and a demographic advantage from the fact the country's 15-64-year-old working age cohort is expected to make up around 70 percent of the population by 2020.