Indonesia's benchmark index started 2013 with a record high, yet economic concerns could make fund investors turn away this year from a country that high domestic growth transformed into a popular safe haven during recent global turbulence.
For some foreign portfolio investors, the concern isn't growth - Indonesia might again grow at least 6 percent - but a series of rare trade deficits and a shaky currency.
The domestic demand that shielded Southeast Asia's largest economy from the global downturn and made it one of the world's hottest emerging markets is part of the root of the problem, as imports are robust while commodity exports have faltered, creating worrying deficits.
Throw in share prices that are high relative to earnings, forecasts for a pick-up in inflation in the new year and political uncertainty ahead of elections in 2014, and Indonesia has lost some shine.
In late 2012, some foreign investors cashed in after years of gains to put their 2013 bets elsewhere. (In 2012, the benchmark index gained 13 percent. It jumped 87 percent in 2009 and 46 percent in 2010.)
"We see foreign interest in Indonesia subsiding, especially in the second half of 2013 ... We might see foreign outflows for a while," said Jemmy Paul, head of equities at Jakarta-based Sucorinvest Asset Management, which manages about $280 million.
While 2012 saw overall net foreign inflows into Indonesian shares, there was a cumulative net outflow of $352 million in offshore equity mutual funds investing in the country last year, according to data from Lipper, a Thomson Reuters company.
(Read More: Indonesia Sees 2012 Growth at 6.3%; Holds Rates)
For sure, some remain bullish on Indonesia, whose benchmark hit a record highs on Thursday and Friday. Local investors poured a net $416 million into equity funds in November.
"If the market corrects, we think it could be a very good buying opportunity," said Soo Hai Lim, fund manager at Baring ASEAN Frontiers Fund, which had about a fourth of $534 million assets in Indonesia at end-November.
Mind The Gap
A decade-long commodity boom created a burgeoning Indonesian middle class looking for imported goods and services such as cosmetics, cars and credit.
For years until 2012, Indonesia didn't have a monthly trade deficit, but there were six between April and November, including a record $1.54 billion in October. That narrowed in November, but rising imports and falling exports produced a $1.33 billion deficit in the first 11 months compared with a $25.4 billion surplus a year earlier.
This year's trade deficits have fueled current account deficits, which have hurt the rupiah. It weakened about 6 percent against the dollar in 2012, making it the worst-performing emerging Asian currency last year.
In the third quarter, the current account deficit was $5.3 billion. The government has estimated a current account deficit for October-December equal to 2.3 percent of gross domestic product.
The deficits "will definitely pressure the rupiah, but we believe it is manageable", said central bank chief Darmin Nasution.
(Read More: Will Indonesia ReplaceIndia in the BRICs?)
The central bank is hopeful that the current account deficit will decline to a "sustainable level" this year, as it sees an improving global economy increasing demand for Indonesia's commodity exports such as crude oil, coal and palm oil.
The country is being cushioned from a worse situation by foreign direct investment, which has surged as manufacturers such as Procter & Gamble bet on future consumption. The government is targeting a record $40 billion FDI in 2013 and is confident economic growth will hold above 6 percent.
But portfolio investors are not convinced. Prices for the country's commodity exports show few signs of rallying. Goldman Sachs forecasts thermal coal prices in key buyer China to decline 8 percent this year, while a Reuters poll of analysts and traders sees palm oil down 13 percent in 2013.
The country's poor port infrastructure holds back export growth and creates high logistics costs. President Susilo Bambang Yudhoyono has promised to spend billions of dollars on infrastructure each year, but there has been little change.
Government budgets, which could provide a stimulus because of falling public debt, are often not spent because of bureaucratic inefficiency and corruption.
"Short-term solutions are not available because there is a need to address the structural issues. The government would need to give more incentives to industry to produce capital goods ... Ideally, the country has to spend for infrastructure, but there are obstacles," said Eric Alexander Sugandi, economist at Standard Chartered in Jakarta.
Weak infrastructure also creates a structural inflation problem, and price pressures are expected to pick up next year when the government will reduce subsidies on power prices. Some economists expect inflation and the need to protect the currency to lead Bank Indonesia to hike rates by the end of 2013.
The rupiah, with its weak 2012 performance, is far from being the added bonus for investor returns that it was in 2009, when it gained 13 percent against the dollar. Some analysts see it weakening further, by as much as 3 percent, in 2013.
The finance ministry plans its first issue of dollar-denominated bonds in the domestic market this year, and will likely issue two tranches of global dollar-denominated bonds in 2013, after its past dollar bond issues were heavily oversubscribed as funds sought Indonesia exposure without the rupiah.
(Read More: Indonesia's President Reassures Investors Economy Is Top Priority)
A further-falling rupiah would undercut Indonesia's attractiveness as a hedge against weak global growth and a proxy for commodities demand. If people get optimistic about global growth in 2013, they may return money to the United States or bet on more export-sensitive economies in Asia.
This is a perennial worry for Bank Indonesia, the country's financial regulator, in a country where around half the stock market and one-third of government bonds are foreign owned, making both susceptible to sudden money outflows.
"The deterioration in the current account leaves Indonesia exposed to swings in portfolio flows," said Goldman Sachs in a bond report. "We see little upside potential but we do see risk to the downside given the country's volatile portfolio flows."
With the economy no longer looking like such a safe place and the glow from the country's recently-won sovereign investment grade status fading after a series of nationalistic government policies in 2012, another knock for the Indonesia story is that many investors find its assets pricey.
Deutsche Bank sees valuations for Indonesia corporate bonds, underperformers in 2012, as unattractive, though it thinks sovereign dollar bonds due in 2022 offer more value than the Philippines after the latter's rally in 2012.
For equities Indonesia, at 3.1 times book value, is the most expensive market in Asia, according to Thomson Reuters StarMine. Some fund managers still see 10-15 percent gains this year in the equity market, propped up by local buying.
Local equity analysts favour consumer stocks such as department store operator Ramayana Lestari Sentosa, cell phone retailer Erajaya Swasembada, developer Summarecon Agung and drug firm Kalbe Farma, to get exposure to greater consumer confidence and spending.
But consumer staples firms trade at 17 times forward 12-month earnings, higher than for Asia-Pacific, data from StarMine shows. Return on equity in Indonesia, and in the region, fell last year.
(Read More: Risks Lurk in Asia's Most Upbeat Economy)
Analysts have been lowering their forecasts for Indonesian earnings this year, while raising predictions for earnings at companies in Thailand and the Philippines, according to Thomson Reuters Datastream.
These factors leave the equity market at risk of a sell-off. The new year may be a tough one as Jakarta valuations are "relatively high versus peers and macro fundamentals are starting to deteriorate", said Mulia Santoso, equity fund manager at Jakarta-based Syailendra Capital, which manages $500 million of assets.