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Indonesia has emerged as the new favourite among emerging markets, with calls for the country to be included among the BRIC nations of Brazil, Russia, India and China – countries slated to join the US and Japan as the world’s biggest economies, by 2050.

The Jakarta Composite Index (JCI) has added 57% so far this year. Year to date, Indonesian stocks are Asia Pacific’s fourth best performers, behind Sri Lanka, Shanghai and Shenzhen. Indonesian bonds and the rupiah have been Asia’s best performers this year. The rupiah rebounded 16.5% from its low in February against the US dollar compared to last year when it lost 14%. Although the JCI has risen 57%, investors are still bullish on Indonesia.

“We like Indonesia because it is a resource-rich country with major commodities like coal, nickel, tin and palm oil. Much attention had been focused on China and India, but due recognition should be accorded to Indonesia. Without supplies from Indonesia, where will China and India be today?” says Eubee Ong, senior fund manager at Phillip Capital Management (S) Ltd in Singapore.

Ong says strategists are reinforcing their positive views on the market after the initial voting results indicate a bigger mandate has been given to incumbent Indonesian president Susilo Bambang Yudhoyono. Although the market has gone up by more than 50% YTD, valuations are still reasonable with forward price-earnings (PE) of around 13 times on the back of strong earnings growth and declining interest rate environment, she says.

“There are still some good quality stocks that are cheaply valued,” she adds.

Sebastian Sharp, head of research at PT Danareksa Sekuritas, has a positive view of the market, given the favourable outlook on inflation and long-term interest rates, which is expected to drive the market to higher levels by the end of the year.

“We do not have a particularly strong sector bias, rather we see opportunities for value stocks in each sector versus the growth stocks which have done very well already in this decade,” he says.

Patrick Chang, an Asean fund manager at CIMB-Principal Asset Management Bhd, thinks the Jakarta market will consolidate but announcement of reforms would reduce the risk premium which should push prices higher.

“More importantly, the earnings season has started, and you’ll probably see the end of the deceleration of negative earnings for the banks, conglomerates and plantation companies. That’s going to be good, as it confirms that consumer demand in Indonesia is going to be strong,” he says.

Chang is bullish on consumer demand and commodities, given Indonesia’s population of close to 240 million and rich resources.
“It’s a little China in the making but the caveat is reforms. If that goes through, you’ll see a big infrastructure boom too,” he adds.

 For now however, Chang believes there are fewer bargains in the market unless companies report better than expected earnings.

“If the earnings come through, then the stocks will get cheaper. So, it’s a question of whether the earnings will come through and I’ve a feeling they will,” he says.

Gerald Ambrose, managing director of Aberdeen Asset Management Sdn Bhd, says the growth in Indonesia’s consumer demand has been impressive. The fund house has exposure to the sector via its core holding, PT Unilever Tbk. However, comparing Malaysia to Indonesia, he believes investors are overlooking the recent liberalisation measures in Malaysia even as Indonesia tightens certain mining laws. “Why else would BHP Billiton sell its Indonesian coal assets after years of investment?” he asks.

BHP Billiton announced last month that it was pulling out of a large coal mine investment in the Indonesian part on Borneo island after years of delay and disagreements with the local government.

How the Indonesian performs from here onwards will depend on Susilo’s next steps. Mark Mobius of Templeton Asset Management Ltd has said the market may face volatility as the final results are tallied and the re-elected president appoints the cabinet and sets the agenda for the next five years.


This article appeared in Corporate page of The Edge Malaysia, Issue 764, July 20-July 26, 2009

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