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Indonesia Stocks To Gain 20% In 2012
Perspective | 30 December 2011

Indonesia’s stocks may climb 20% in 2012 after posting the third-biggest gains in Asia in 2011 on the prospect of credit-rating upgrades and increased infrastructure spending, said the nation’s third-largest fund.

Standard & Poor’s and Moody’s Investors Service may follow Fitch Ratings in upgrading the nation’s debt rating to investment grade, said Yudhistia Susanto, the Jakarta-based head of equity at PT Manulife Asset Management, which manages about US$3.8 billion. Susanto favors banking and cement stocks as they will benefit from falling interest rates and higher spending on road, port and airport projects, without naming any shares.

“Starting with Fitch and next year Moody’s and Standard & Poor’s, the investment grade story will have a positive impact on our cost of capital,” Susanto said in a 23 December interview. “It will provide sustainability for a low interest-rate environment.”

The Jakarta Composite Index fell 0.2% to 3,789 at the close on 27 December, catching up to losses in Asian markets after being shut on 26 December. The measure has gained about 2.3% in 2011, adding to a 46% jump in 2010, after the central bank cut its benchmark interest rate to a record low amid easing inflation and Fitch’s upgrade on 15 December. The country lost that rating in 1997 during the Asian financial crisis.

Indonesia’s benchmark measure may rise 15% to 20% from 2011’s close, Susanto said. Shares on the index are trading at 15.1 times estimated earnings, Asia’s most expensive after Japan, according to data compiled by Bloomberg.

“There’s limited availability of quality stocks,” Susanto said. “That’s why the valuations of quality stocks continue to rise. In times of global uncertainties people tend to invest in businesses that generate stable cashflow.”

Growth Outlook

Susanto said in a 26 September interview with Bloomberg Television that he recommends cement stocks. PT Semen Gresik and PT Indocement Tunggal Prakarsa, the two largest producers of the building material, have jumped at least 39% since then, compared with a 14% gain for the Jakarta Composite.

Indonesia’s economy, the biggest in Southeast Asia, is set to expand 6.5% in 2011, the fastest pace since 1996 even as global growth slows. The central bank, which made the forecast, said domestic consumption will help cushion slowing exports amid a debt crisis in Europe and easing growth in China. The central bank cut its benchmark interest rate to a record low of 6% in November and inflation for that month eased for a third month.

Fitch raised Indonesia’s long-term foreign and local currency rating to BBB-, the lowest investment-grade level, citing the country’s “strong and resilient economic growth.” Indonesia’s new credit rating puts it on par with India.

Rating Outlook

“Although this is a big positive milestone for the country, we believe that the rating upgrade is in the price, both in the bond and equity markets,” Morgan Stanley said in a 16 December note. “We expect limited impact on the equity and bond markets on the back of this rating upgrade.”

S&P may raise the credit rating if the government continues to improve fiscal, administrative and structural reforms, the company said on 20 December in an e-mailed response to questions from Bloomberg. Indonesia’s macreconomic resilience is “credit positive and would support the case for an upgrade,” Christian de Guzman, assistant vice president at Moody’s in Singapore, said 23 December in an e-mail message. The two companies may boost Indonesia to investment grade in the first quarter of 2012, Coordinating Minister for the Economy Hatta Rajasa told reporters in Jakarta 20 December.

Land Bill

Indonesia’s parliament approved on 16 December a land-acquisition bill that aims to accelerate infrastructure projects. President Yudhoyono has pledged to double spending on roads, seaports and airports to US$140 billion to help deliver average growth of 6.6% over the remainder of his term ending in 2014.

Indonesia’s 2011-2025 development plan seeks RP4,012 trillion (US$442 billion) of investment, with 45% of that for highways, harbours and power plants. Yudhoyono is seeking to improve Indonesia’s roads, bridges and ports to spur annual economic growth of as much as 9 %. China’s economy grew 9.1% and India expanded 6.9% in the third quarter of 2011.

The law change means Indonesia will be able to double the amount of infrastructure spending in the next two or three years, Trade Minister Gita Wirjawan said in a 16 December interview in Geneva. East Java-based Semen Gresik rose 8.4% in the week the land-acquisition bill was passed. The company said on 13 December that it expects to start operating two new cement plants in 2012, helping it tap into rising demand.

“At the beginning of the year, barring any negative news from Europe, cash allocation of global fund managers will start to be invested again in emerging markets,” Susanto said. “Among emerging markets, Indonesia’s position is quite attractive.”

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