Analysts expect downward correction in Jakarta market

Rendi A. Witular, The Jakarta Post, Jakarta

After hitting record highs on five consecutive trading days, the Jakarta stock exchange is likely to head downward this week after the week-long Idul Fitri holiday, as share prices in the market are already considered overbought.

The Jakarta Composite Index ended at a new record of 934.03 on Nov. 12, up by about 4 percent from 893.63 on the previous week's closing.

Stock analyst Adrian Rusmana of BNI Securities said the bourse was currently overheated with a weekly yield of 4.15 percent in U.S. dollar terms, making it the world's fourth most lucrative bourse.

"Technically, the index is already in 'extremely overbought' territory. This leaves the way open for the bourse to head for a correction," said Adrian in a note to investors on this week's outlook for the Jakarta market.

BNI Securities forecast that the Index will hover in a range of between 930 and 863 this week.

Adrian explained that, fundamentally speaking, shares in Jakarta were relatively expensive compared with other bourses in Southeast Asia, with the Jakarta Index's price earnings ratio (PER) currently standing at 15.2 times, higher than those of Singapore (13.9 times), Thailand (10.9) and Malaysia (15.0).

The Index's higher PER was not come in tune with the sovereign ratings given by international rating agencies, which rank Indonesia lower than Singapore, Malaysia and Thailand.

The lower ranking means that investment conditions in Indonesia, both as regards portfolio and direct investment, are poorer than in those three countries.

"The surge in the Index over the last couple of weeks was primarily driven by the 'emotional' response of market players to the World Bank's decision to revise the country's economic growth upwards," said Adrian.

"This, however, is too weak to prop up the Index as the World Bank also revised up growth forecasts for other countries in the region, and their stock markets turned out to be less affected by the reports," he said.

The World Bank said the country's gross domestic product would grow by 4.9 percent this year, up from its initial projection of 4.5 percent. It also expected the Indonesian economy to grow by 5.4 percent next year, up from its initial forecast of 5.0 percent.

Elsewhere, a stock analyst with Mandiri Securities said the surge in the Index was unlikely to continue this week unless there was intervention from the government ahead of its plan to sell its minority stakes in a number of banks next month via the stock market.

"The plan is expected to drive up sentiment for investors, especially as regards banking shares," said the analyst.

The stock market usually goes into rally mode ahead of government asset divestments, with some analysts suggesting that such rallies are partly driven by state pension funds and insurance companies being ordered to pump funds into the market before withdrawing after the sales have been completed.

The finance ministry's Asset Management Company (PPA) has confirmed that it will sell 20 percent of the government's stake in Permata Bank in December to help plug the state budget deficit.

The government is also planning other sales in the same month, including possibly its minority stakes in Bank Internasional Indonesia (20.78 percent), Bank Central Asia (5.04 percent), and Bank Niaga (21.51 percent). The government earlier this month sold 10 percent of its shares in Bank Danamon for Rp 1.74 trillion.