News Room - Business/Economics

Posted on 16 Jul 2009

The Indonesian market: H2 outlook and beyond

We remain positive on Indonesia's outlook for the rest of 2009 and beyond.

 

However, for the equity market, there has been no post-election euphoria following the re-election of President Susilo Bambang Yudhoyono (SBY).

 

In fact, the Jakarta Composite Index (JCI) has remained relatively flat, up just 1.6 percent so far in July (please see chart for details).

 

In our view this is due to four reasons.

 

First, plain and simple: Global stock markets have traditionally performed poorly during the summer months of June, July and August.

 

Secondly, stock market participants have pretty much priced in a smooth SBY win in one round, and testimony to this is the fact that year-to-date, the JCI is currently the second best performing market, up 52 percent, in the region next to China, which is up 73 percent year-to-date.

 

Third, while SBY's projected re-election was helped by falling global oil prices, which allowed the president to cut fuel subsidies three times last year (the last was in December 2008), the country's capital market has recently suffered as a result of commodity price weakness given that 30 percent or US$151 billion in market capitalization of the JCI is comprised of commodity-related counters.

 

Finally, the steep year-to-date rise in the Jakarta capital market has driven valuations to levels that are no longer cheap.

 

Based on our earnings projections, the market is currently trading on price to earning (PE) ratio of 15x, reflecting the defensive nature of our economy relative to the global markets that are experiencing economic contractions.

 

We expect that Indonesia's Q2 economic growth is likely to reach around 3.7 percent - 4.0 percent, on target to beat our conservative 2009 GDP growth forecast of 3.4 percent.

 

This is mainly supported by around 4 percent growth in private consumption.

 

Additionally, another support factor for growth would be continued falling interest rates, although the benchmark rate of Bank Indonesia (BI) has fallen 250 basis points from 9.25 percent in the beginning of the year.

 

Our view is that there is still room for the benchmark rate of the BI rate to further fall to 6 percent from the current 6.75 percent level.

 

The latest cut in the BI rate was on the back of lower than expected June inflation, 0.11 percent month-on-month, coupled with some 10 percent rupiah (IDR) appreciation in first semester of 2009.

 

This paved the way for a relatively stable forex reserve in June, which reached $57.6 billion, sufficient to finance 5.6 months of imports and the government's external debt payments.

 

We expect year-end inflation to remain subdued at 5 percent.

 

In our view, falling interest rates will remain supportive of Indonesia's equity as well as debt markets - this is particularly true for bonds with short tenors.

 

It is worth pointing out that the Indonesian market continues to remain attractive in 2010 given a PE of 12.5x, translating to PE to a growth of only 0.6x.

 

On politics, we are encouraged by the presidential election that is already out of the way early (i.e. in just one round).

 

In this way, we believe that politicians can now better focus on improving the Indonesian economy.

 

Therefore, we should see a second-half (H2) of 2009 acceleration in terms of infrastructure-related projects.

 

This coupled with the formation of a strong new Cabinet in October 2009 could be just the right ingredients to ensure sustained market performance in the second semester of the year and beyond.