By Harry Su, Bahana Securities
Amid Japan’s jolt, the Indonesian market has held up well coming off just 0.3 percent since Friday even amid redemption from Japanese funds. The paralysis affecting Japan, particularly with possible radiation crisis, will mean slower global economic growth, but this would be positive for the Indonesian market given a large domestic consumption (Chart 1) of 64.7 percent (i.e. private consumption and government expenditure), which can act as a shield against external volatilities.
Thus, we advise investors to seek shelter in domestic consumer stocks, which can act as safe havens against global economic tremors. The prospect of slower global economic growth has softened commodity prices (Table 1). Based on commodities under our monitor, wheat has declined the most, down 9.9 percent since last Friday. This coupled with 2.6 percent decrease in CPO prices will have a positive impact on Indofood Consumer Branded Products (ICBP) for example as flour and cooking oil account for some 50 percent of total cost of goods sold.
With oil prices also on the decline, Kalbe Farma’s petroleum-based raw materials will also mean margin support for Indonesia’s largest pharmaceutical play.
Another beneficiary would be the airline sector, which is likely to benefit not only from lower oil prices but also from more flights and higher ticketing to and from Japan as tourists cut short their visits.
On the back of softer commodity prices, we expect contained domestic inflation going forward, translating to less probability of further interest rate increases by the Indonesian central bank. This would spell good news for the banking sector.
On commodities, Japanese plants being shut down and houses/ buildings being wiped out suggest less energy usage for now, and we expect coal and metal prices to fall as a result. However, disruptions in Japan’s nuclear power coupled with reconstructive efforts could result in greater coal imports and thus higher prices in the medium to long term in our view.
Hence, we remain Overweight in coal, although risks lie in possible delays from heavy equipment deliveries from Komatsu Japan. This could mean that expansions in the coal mining sector could be disturbed. We note that United Tractor (UNTR) has been the worst performing stock since Friday, down 5.3 percent.
On metals, we expect minimal impact given Japan’s low 4-11 percent global base metal consumption share. Again over the medium term, as Japan rebuilds and damaged vehicles/electronics are replaced, there will be higher demand for both nickel and tins. We highlight that Aneka Tambang, for instance, exports 40 percent of its nickel ore to Japan.
On the macro front, we expect investment from Japan into Indonesia to decline. Additionally, there will be delays in shipping schedules for Japan’s exports and imports given infrastructure damage, including ports.
It is worth pointing out that 13 percent of Indonesia’s non-oil/gas exports are to Japan (Table 2), equivalent to US$16.5 billion, the biggest market for Indonesia’s exports. Among the top items exported are iron and ashes (Table 3).
On imports, 15 percent of Indonesia’s overall imports are from Japan, second largest importer of non-oil and gas goods after China, with nearly $17 billion in total 2010 imported products (Table 4), led by machinery and vehicles (Table 5).
Bahana Research Team would like to take this opportunity to express our deepest condolences to everyone who have been adversely impacted by this tragedy. We are certain that Japan will in turn jolt the world through its perseverance and by quickly getting back on its feet again.The writer is senior vice president and head of research at PT Bahana Securities