Indonesian Equities in 2017
Category: Column By : Rainer Michael Preis Read : 293 Date : Friday, June 02, 2017 - 16:25:35

Year-to-date the investible universe of 544 Indonesia stocks is up 2.5% and the Jakarta Composite index (JCI) has risen 8.2%, underperforming most other ASEAN markets (Singapore 15.7% Philippines 15.1%) in general and major North Asian equity markets in particular (Hong Kong 12.5%, Korea 19.7%).

The relative underperformance of Indonesian equities comes at a time when the JCI traded at its biggest premium over the MSCI Emerging Markets Index for more than a year. The JCI benchmark is now 15.5 times earnings projected over 12 months, above the 14.4 average for the past five years. Foreign flows have been supporting the market as domestic funds trimmed down.

Here are the sector returns year-to-date: basic materials did best with 9.9%, followed by telecom 6.5%, then industrials at 3.4%. Health care was 2.7%, and consumer services and financials tying for fifth place with 2%. Meanwhile, utilities dropped 6.6%.

In valuation, the investable universe trades at a PE of 13.6. Health care, traditionally an expensive sector, remains so at a PE of 35.4, followed by telecom at 18.3, tech at 15.6, consumer goods 15.1 and consumer goods at 15.1.

It’s worth noting that financials and banks are relatively cheap now at a PE of 10.2. As such, many investors are buying bank stocks, which have already started to perform well in anticipation of loan growth revival and signs of balance sheet recovery.

On the macro front, Indonesia’s February unemployment rate declined to 5.3%, from 5.5% a year earlier. Indonesia’s 1Q GDP on the other hand, came in weaker than expected, and rose just 5.01% year on year, missing estimates for a 5.13% increase. An expansion in capital spending and sustained growth rates of around 5% in Indonesia compares favorably with developed markets, but are too low for Indonesia’s potential. President Joko Widodo still targets 7% growth by the end of his term in 2019.

Last year’s interest rate cuts continue to fuel investment demand once the post-tax amnesty dust settles and property sales revive. The consensus GPD forecast for full year 2017 now stands at 5.2% and for full year 2018 at 5.4%. Exports remain the main growth driver, along with household consumption and government spending.

Weakness in the construction and property sectors has led to earnings misses of large cap stocks, including Indocement and Ciputra Development, but earnings may recover soon. Growth may accelerate as Bank Indonesia’s monetary easing and fiscal stimulus work their way through the economy and translate into higher earnings.

Indonesian equities are expensive by historic metrics but remain good long-term bets due the country’s demographic profile, rising household incomes and abundant natural resources. Corporate earnings growth is expected to become broader in the second half and, given the pronounced underperformance recently, Indonesian stocks may play catch up with world markets. Investors should consider Indonesian companies benefitting from a pick-up in consumer spending, and stocks leveraged on Indonesia’s infrastructure development. 



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