Analysts bullish on RI's consumer stocks

Analysts bullish on RI's consumer stocks

SINGAPORE (Dow Jones): In a good quarter for funds investing in Indonesia, a big bet on consumer stocks saw Indocam Asset Management's Malacca Fund go one better: Indocam's fund gained nearly 196 percent in U.S. dollar terms in the second quarter, according to fund trackers Lipper Inc., compared with a sector average gain of 119 percent.

On average, Indonesian funds beat all other worldwide sectors in the three months ended June 30, according to Lipper.

Thanks to a plunge in interest rates, currency gains and a stable political climate as Indonesians went to the polls, Jakarta's main stock index rose 68 percent during the quarter, or 112 percent in U.S. dollar terms.

Singapore-based Indocam fund manager Jenny Sofian bet that falling interest rates would stoke domestic demand, propelling the shares of companies that cater to consumers.

"We benefited because we were early in investing in consumer stocks," Sofian says. "We were seeing interest rates come down all across Asia, but in Indonesia we were seeing inflation come down faster, so we decided to load up on consumer stocks."

The sector's second-best-performing fund in the second quarter, the Dresdner RCM NT Indonesia fund, gained 170 percent.

During the second quarter, Sofian boosted the fund's holdings of consumer stocks to 53 percent of assets, from about 35 percent in the first quarter. At the same time, she trimmed the fund's telecommunications holdings to 4% of its portfolio from 14 percent and its 22 percent cash position to zero.

While the fund would also have benefited from holding cash, given the Indonesian rupiah's 34 percent gain against the U.S. dollar, it got more mileage from being invested in stocks.

During the quarter, the share price of pharmaceutical concern PT Kalbe Farma almost tripled, while car maker PT Astra International jumped about 150 percent. The two stocks are among the fund's 10 largest holdings.

Sofian says the Indocam fund also benefited from having 11 percent of its assets in capital-equipment stocks - the fund's second-largest sector weighting - such as PT Komatsu Indonesia and PT United Tractors.

The share price of Komatsu rose 117 percent, while United Tractors increased three-fold. They were a play on a return to economic growth - and the rebuilding of infrastructure damaged during Asia's financial crisis, she says.

The economy is set to grow 1.5 percent to 2.5 percent this year, up from a previous forecast of flat to 2 percent growth, and a contraction last year of 13.7 percent. Despite the confident growth forecast, analysts expect it will take several years before Indonesia will return to its 7 percent pre-crisis growth levels.

Another second-quarter bet: bank stocks. Sofian raised banks to 9 percent of assets from 3 percent in the first quarter, cheered by strong management at some banks and progress made on recapitalizing banks under the Indonesian Bank Restructuring Agency.

Sofian expects to keep a big chunk of the fund's money in consumer, capital-equipment and banking shares. But she warns that a repeat of the stellar performance in the second quarter isn't probable.

Sofian expects gains will taper off to about 20 percent over the next 12 months. That's because benchmark one-month Sertifikat Bank Indonesia, or SBI, rates having already fallen to around 15.86 percent from around 80 percent last year, are already believed to be near the floor. Now, she says, share price movements will depend far more on the outlook for earnings at individual companies.

"In the second quarter, we saw gains related to low valuations and stocks enjoyed the benefit of a liquidity push," Sofian says. "But from here we have to see evidence emerge of a real return to overall earnings growth."

The rate of increase in Indonesia's stock market is likely to slow, agrees Robert Subbaraman, an economist with Lehman Brothers in Japan.

"Over the long term, the economy still has severe structural problems in the financial and corporate sector," he notes. "In the next six months there are risks that there could be some setbacks."

The most immediate risk to many analysts: that political jockeying before presidential elections slated for November could shatter the current calm and weigh on the strength of the Indonesian currency.

"Politics is going to come back to the fore when we get closer to the time when the president is chosen," says Daniel Fineman, regional strategist with Jardine Fleming in Hong Kong. "The political situation is still rife with uncertainty and could cause sentiment to turn negative in September and October."

But economists expect any administration selected in November to continue with economic policies in line with prescriptions of the International Monetary Fund. This would lay further foundations for a recovery in corporate profit growth.