Thu, 30 Sep 2010
When will the ride end for the Jakarta Composite Index? It enjoyed another record-breaking day on Wednesday, rising 0.7 per cent, flirting with the 3,500 mark and breaking fresh records for a fourth successive day.

On Monday, the index surged 2.1 per cent, with around 7bn shares totalling $699m changing hands on that day alone. Indonesia’s buoyant economy gross domestic product for the second quarter clocked in at an annualised 6.2 per cent and a healthy rise in consumer spending are fuelling investor interest, particularly from overseas.

Consumer stocks lead Indonesian rally“It’s a very popular market these days,” says Nick Cashmore, head of brokerage at CLSA Indonesia. “If you look at the sectors that have outperformed, consumer companies have been significant. They are up over 50 per cent for the year. Commodity companies have underperformed. The focus has been firmly on domestic demand.”

In local currency terms, the JCI is up 46.5 per cent for the year, making it the best performer among major markets in Asia. In the third quarter, the index has risen more than 20 per cent, making it south-east Asia’s third-strongest performer behind the Philippines and Thailand.

This current run makes it easy to forget the dark days of October 2008, when the JCI plummeted by more than 50 per cent during the global financial crisis, forcing the Indonesian Stock Exchange to stop trading for three days.

Since then, the JCI has grown threefold, its fortunes mirroring a rosy macroeconomic situation that is drawing increasing capital inflows into Indonesia. In 2009, Indonesia had the second-best performing market in the world, up nearly 86 per cent.

“The market is driven by capital inflows that are adding to portfolios in Indonesia, as Asia and [Indonesia] have higher gross domestic product growth and profit growth than the US and European countries,” says Mirza Adityaswara, managing director of Mandiri Sekuritas in Jakarta.

“As long as the US and European economies remain relatively weaker and interest rates there are very low, there’s no incentive to put money in dollar assets.”

Mr Adityaswara notes that the Indonesian market’s valuation is not cheap, and it is trading above historical price-to-earnings multiples, although below peaks reached in July 2007. “But we still have good profit growth,” he says.

Mr Cashmore says the JCI is being driven by underlining earnings rather than capital inflows.

“Money flow is one thing that drives prices, but so do corporate profits,” he says. “Not just corporate profits today but also the expectation of profits tomorrow is going to drive profits. People will pay more for a company if they feel it will grow at a faster rate.”

He adds that the talk of quantitative easing in Japan and the US will lead to significant inflows of new money coming into Indonesia for hard assets.

It’s nothing that Indonesia has done,” he says. “I don’t believe that there’s any sort of policy changes that make this place look so fantastic.”

Regardless, Indonesia is clearly on an upward trajectory. The country was the third-biggest mover in the World Economic Forum’s 2010-2011 Global Competitiveness Index rankings, released earlier this month, rising 10 positions to 44th place.

Edwin Sinaga, president director of brokerage Financorpindo Nusa, says that Indonesia’s fundamentals including growth, low benchmark interest rates and foreign direct investment are all sound.

He notes that there were concerns about inflation, but says that it will not pose a problem for the country in the short term.

Instead, Mr Sinaga predicts that the JCI could be heading toward a short-term bubble in the next two to six months because of excessive capital inflows.

In the longer term, however, a bubble in the Indonesian market is unlikely, analysts say.

“Everyone keeps talking about it, but how can it be on a bubble when it’s on 13 times 2011 earnings, and 25 per cent earnings growth and an appreciation in the currency that’s gone up 5 per cent this year?” Mr Cashmore says.

“I don’t think that sounds like a bubble. Just because stock prices have gone up doesn’t mean it’s a bubble,” he says. “The increase in stock prices has been matched by rapid growth in earnings.”

Certainly, a bubble is the last thing the Indonesian government wants.

Speaking at a Jakarta Foreign Correspondents Club dinner on Wednesday, the country’s finance minister Agus Martowardojo sought to assure investors: “We would like to convince the world, the market, that we don’t want a bubble situation in Indonesia,” he said.



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