: Super User; Indonesia; 19 April 2012; Hits: 1259

Sluggishness of Indonesian Bourse only Temporary

ONCE the darling of regional investors in the wake of the global financial crisis, the Indonesia Stock Exchange (IDX) has been lagging behind its regional peers so far this year.

The benchmark Jakarta Composite Index (JCI) rose a mere 8 per cent in the first three months. Compare this with the performance of Japan’s Nikkei, which jumped 20 per cent, the 16.9 per cent gain in Thailand’s SET, and the 12.6 per cent increase in Singapore’s Straits Times Index (STI), and it appears that something is seriously wrong. Or is it?

After posting strong earnings in 2011, Indonesian companies are paying out higher dividends this year. And with dividend yields rising at a time when rates on savings deposits and government securities are falling, shares should be becoming even more attractive to investors.

According to Bloomberg, listed companies in the LQ-45 index reported 156.7 trillion rupiah (S$21.4 billion) in net income last year, up 26 per cent from 124.5 trillion rupiah in 2010. LQ-45 is a category that includes the 45 companies with the highest market capitalisation and transaction value in the previous 12 months.

Earnings at Bakrie Sumatera Plantations more than tripled to 806 billion rupiah, while Kawasan Industri Jababeka, an industrial estate developer, reported a 425 per cent rise in net income to 326 billion rupiah. Other companies reporting strong profit growth include chemical distributor AKR Corporindo, and coal miner Borneo Lumbung Energy & Metal.

Investor interest, however, has been disappointing.

Recent social unrest is hardly the reason. Despite the chaos across the country on March 30 as demonstrators opposed the planned removal of oil price subsidies, the JCI continued to rise.

On April 4, however, it was a different story as stocks suffered their worst drop in more than four months. Banks and automotive companies were particularly hard hit.

After more than three years of solid gains, many investors appear to be looking for an excuse to take profits. Local observers pointed to international developments to explain the April 4 sell-off. The release of the minutes of the US Federal Reserve Bank’s March policy meeting, they said, reduced expectations that the US central bank would step up asset purchases in what has been popularly called “quantitative easing”.

That events such as these could have such a marked impact on the Indonesian Stock Exchange suggests that the local bourse is at a different point in the recovery cycle when compared to neighbouring countries.

Year-on-year comparisons illustrate the point. In the 12 months to early April, the JCI rose 11 per cent – about the same as that of Thailand. Other stock markets in the region, however, did much worse. The Kuala Lumpur exchange rose by a mere 2 per cent, while the STI remained 7 per cent below its April 2011 level.

Seen from this perspective, the JCI has risen rapidly, implying that the local market may be due for a correction.

Fear of unfavourable regulatory changes has also played a part in the lacklustre performance so far this year. Mining shares in particular have been hit by the news that the government is planning to impose a hefty tax on mineral exports. Reports say that the government is considering a 25 per cent export tax on coal and base metals, which would start this year and rise to 50 per cent next year.

The more important reason for the lukewarm investor response to the stellar profits being reported by listed companies, however, is the expectation that higher oil prices resulting from the elimination of oil subsidies will fuel inflation.

One indication of this is the fact that foreign investors have been reducing their holdings of rupiah-denominated government debt papers. From a record of more than 34 per cent in the third quarter of 2011, foreigners held just 29 per cent at the end of last month. The sell-off has also had an impact on the rupiah, forcing it to weaken against the US dollar.

More importantly from the perspective of stock market performance, however, is that the prospect of higher inflation has raised the spectre of higher interest rates, prompting concern that consumer demand could weaken significantly in the coming months.

Most analysts nevertheless see the recent disappointing performance of the exchange as a temporary phenomenon. As CIMB strategist Chang Chiou Yi pointed out to me last week, an improved macroeconomic position, as reflected in lower foreign debt and recent upgrades by risk rating agencies, means the country is likely to remain attractive to foreign investors in the medium term.

CIMB Research recommends investors remain overweight on the Indonesian market. Despite the more positive performances of other regional bourses in the first three months of this year, there seems no good reason to question this assessment.

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Key Political Risks

Asia is the fastest growing region in the world, and is likely to remain so in 2013. However, a number of risks cloud the picture.

The good news is that domestic demand in the region remains strong and should continue to cushion the impact of weaker external demand on overall economic growth. The completion of national elections in Japan and South Korea in December 2012 should also help reduce political uncertainties.

But Asian governments will need to guard against the adverse impact of prolonged easy financial conditions on inflation.

Rising inequality also continues to threaten social stability. Ethnic and religious rivalries remain just below the surface in many countries. When combined with government corruption and (in some countries) high youth unemployment, this could become a deadly mix. This seems particularly true of China.

Territorial disputes also require close monitoring. Much diplomatic activity in the new year is likely to be centered on finding ways to reduce tensions over resource-rich islands in the South China Sea, where Beijing's claims overlap with those of Japan, Vietnam and other Southeast Asian states. South Korea and Japan also have rival territorial claims.

North Korea remains the wild card. Inclined to believe its own propaganda, Pyongyang's new leadership could miscalculate, making belligerent moves that plunge the region into a military conflict that nobody wants.