Update on Indonesian Equities
    Category: Column By : Rainer Michael Preis Read : 559 Date : Monday, September 04, 2017 - 12:18:53

    Indonesia’s Jakarta Composite Index (JCI) has risen 8.9% in rupiah terms and 10.3% in dollar terms. Indonesia’s investable universe of 558 stocks is currently at a blended forward 13.4 PE ratio. At this valuation, the question for investors is the sustainability, as earnings disappointment may stall JCI further outperformance.

    Healthcare, at 30.6x, is the most expensive sector while Oil & Gas at 3.6x is the cheapest sector. Technology is 16.2x, Telecom 15.5x, Consumer Services 14.5x, Industrials 12.5x, Financials 11.5x, Basic Materials 11.4x and Utilities 9.9x.

    The year-to-date return on the broad market investable universe is 2.6%. The most expensive sector, healthcare, is the second worst performing sector with a 1.8% loss only outpaced by utilities’ 10.2% loss. Telecom is the best performing sector and has a consensus overweight from analysts, as it is growing on data monetization. Technology with a 15.5% return is the second best performing sector, followed in third by Basic Materials with a 12.6% return.

    Consumer goods and consumer services sector stocks year-to-date returns are both flat and 0% return. Investors think competition in the Indonesian retail industry will intensify if Alibaba enters the domestic market. Alibaba is said to be in talks to make a major investment in Indonesia’s online giant Tokopedia. Analysts now see limited upside potential among consumer discretionary and selective consumer staples stocks.

    Financial stocks returned 3.8% and the Industrial sector returned a modest and broad return of 3%. Renewed interest rate cuts could help banking shares. Banks’ balance sheets have improved and they should be more aggressive in lending in the second half. Bank Indonesia has signaled a return to an easing bias, after being Asia’s biggest rate cutter in 2016, easing six times until pausing late in the year.

    Bank Indonesia still sees room to ease to support economic growth, if inflation remains manageable and the exchange rate remains stable. Despite the aggressive easing action last year, Indonesia’s economic growth is stuck around 5%. President Joko “Jokowi” Widodo has vowed to achieve growth of 7% when he came into office almost three years ago. Bank Indonesia’s forecast for 2017 was 5.3%. With inflation likely already peaked, sluggish growth is now the focus.

    It will be hard for the JCI to sustain 12-year high valuations of a price-to-earnings ratio of 16 amid declining corporate profits. Without earnings support, the stock market could see a correction of at least 5%. Overall earnings have seen a 2% downgrade since April. Companies with upgrades after 2Q dropped to 38% from 51% in 1Q. Downgrades have come from industries including property, retail, autos, cement and plantations. Expect earnings to be revised down further in the coming weeks. Investors should consider companies with “secure” and stable earnings and that often favors the Telecom sector, this year’s best performing sector.

    Valuation problem is in Indonesian mid-caps; large cap indices are in line with historic norms, and attractive relative to local bonds. Investors can “overweight” financials, consumer discretionary and technology, while avoiding consumer staples, energy, healthcare, utilities and materials stocks for the rest of this year.