JSX offers chance for long-term, selective buying: Fund managers

JSX offers chance for long-term, selective buying: Fund managers

HONG KONG (Reuters): It could still all end in tears, but the Indonesian stock market offers plenty of opportunity for long- term investors, Asian fund managers say.

Jakarta's JSX Composite index continued to ebb lower on Thursday with concern about the slow pace of ballot-counting offsetting Tuesday's euphoria, when the stock market soared as much as 14 percent on Indonesia's surprisingly peaceful -- but slow -- transformation into the worlds third largest democracy.

But the reasons for fresh optimism about Jakarta reach far beyond politics, fund managers say. The market potential is so strong that recent election euphoria will soon be remembered only as one blip along a lucrative long-term road, they predicted.

Among key facts to remember about the Jakarta stock market is that 100-percent inflation has distorted the value of the composite index, which remains down more than 50 percent from its pre-crisis high in U.S. dollar terms.

"This market remains pretty underpriced by comparison to where it was. It was the largest falling market from peak to bottom," said Stewart Aldcroft, director of sales and marketing for Templeton Franklin Investors (Asia).

Templeton says Jakarta will become the best performing market in Asia this year.

In addition, a number of analysts remain convinced the rupiah is under-valued, suggesting even better U.S.-dollar returns for investors now waking up to Jakarta's inflation-adjusted value.

"Not only will the market rise in domestic currency terms but as the market rises the rupiah will give it a kicker and it stands out for international investors on those terms," said Peter Perkins, regional strategist at Daiwa Research.

The problem for international investors, however, remains market liquidity.

Jakarta's market capitalization has shriveled to roughly $25 billion from more than $70 billion pre-crisis -- and of the composite index's 271 constituents, only four stocks are of an appropriate size to allow international investment.

Telkom Indonesia dominates the index with a weighting of nearly 15 percent, followed by consumer products conglomerate Gudang Garam with a weighting of 12.39 percent according to Reuters 3000.

Both these stocks have massively outperformed the main index, with Telkom Indonesia reporting a PE multiple of 39 times against an index average of four, while Gudang Garam's PE is at 33 times.

"It doesn't take much to move this market. Individual Bunters are moving this," said Anand Aithal, strategist at Goldman Sachs.

Perkins added that there was evidence individual punters in Indonesia were moving bank deposits back into the stock market where there were plenty of mid- and small-sized bargains to be had.

Aithal backed a highly selective approach, advocating a long- term view that focused on the overall economy and the restructuring challenges ahead. Political considerations were relevant only in that they dictated an aversion to stocks linked to former president Soeharto.

"You must go stock by stock, and if you find companies that are levered to economic recovery you're probably okay," he said.

For international investors, direct investment remains a more important indicator of recovery than the stock market, added Aldcroft, who stressed the importance of the Indonesian Chinese.

There has been concern that rising tension in Indonesia could fuel an exodus of people from the country, particularly the country's economically dominant ethnic Chinese.

"A large proportion of the money that left last year belonged to Chinese who felt disenfranchised, and it's very important for the future of Indonesia that these people are given some encouragement to tern hark," he raid.