Stocks an option during high inflation

By Reiner Simanjuntak

JAKARTA (JP): The current uncertainty and looming hyperinflation in Indonesia's economy demands investors to be especially shrewd in assessing investment risk, fund managers have warned.

They said that people should not put all their eggs in one basket.

But the stock market may offer good opportunities for optimum return, especially in this high inflation environment.

Elwin Karyadi, marketing director of fund management operations at PT ABN AMRO Manajemen Investasi said the uncertainty caused by the country's currency crisis forced people to be extra careful in investing their money in such a way that the risks were minimized.

The rupiah has been on a roller coaster ride following its free float in August. It dropped to its lowest level in January this year at Rp 17,000 to the U.S. dollar, compared to Rp 2,450 in July last year. The currency is hovering at the Rp 9,000 level these days.

The rupiah's sharp depreciation has caused a serious financial problem in all business sectors.

"I think many have now begun to understand the importance of diversifying their investments in order to minimize risk. This is good," he said.

Although risk diversification is generally good, for optimum investment return the Jakarta stock market should offer some good opportunities, said Roland Haas, president director of PT Lippo Investment Management.

He said that the rupiah could strengthen or continue to weaken, investors would still make money from stock investment.

"I'm a strong believer in the stock market," he said, adding that stocks would protect the value of the rupiah against inflationary pressures.

The government recently announced that the inflation rate in February hit 12.76 percent, the highest monthly inflation rate in 30 years, prompting analysts to say that the country may be heading towards hyperinflation.

The inflation rate for January and February alone has already reached 19.64 percent, almost the same level as the 20 percent projected by the government for the next fiscal year, which will begin next month.

Elwin admitted that investors willing to take higher risks for larger yields had been entering the equity market, especially since the Jakarta equity market seemed to be vibrant lately with the composite index surpassing the 500 level Tuesday.

He said, however, that many still question the prospects of Indonesian listed companies, especially those with U.S. dollar debts.

The sharp depreciation of the rupiah has caused many companies to be technically bankrupt due to their mounting foreign debts.

"I'm advising people to invest in selective companies," Haas said, adding that some companies would be able to service their foreign debts, especially if the rupiah strengthens.

He said that the 75 percent drop in the rupiah had been a record in terms of its magnitude and speed. This would suggest that the currency has reached its bottom and the only way to go is up.

He explained that the stock market has discounted most of the negative news. The only thing that the market had not been able to assess is whether Jakarta would face widespread rioting due to the economic crisis which has sent staple food prices skyward.

But for investors with a time horizon of at least one year, the stock market should be a good investment target, Haas said.

He explained that for those who believe that the rupiah would continue to decline, companies with a U.S. dollar earning base are good targets. This includes tin mining operation PT Tambang Timah, international telecommunications firm PT Indosat and agribusiness company PT Astra Agro Lestari.

For those who think the rupiah will strengthen, companies like cigarette maker PT HM Sampoerna, instant noodle manufacturer PT Indofood Sukses Makmur and cement maker PT Semen Gresik are some of the choices.

Haas, however, stressed that even if the rupiah stabilizes, companies with dollar-based earnings are still good investment targets. "In the short-term you may see some profit taking. But I would retain them for the long-term."

He said that there are many fund managers who are currently sitting on their cash and they would have to allocate some of their money to the region.

He added that even short-term investors can still make money from the Jakarta equity market because there are stocks moving by 20 percent in one trading day.

However he suggested that investors should not buy aggressively for the time being.

Agus Dharma, president director of fund management firm PT Intru Nusantara, advised people to let professionals handle their investments, especially with the current uncertainty.

He recommended that the public invest through mutual funds, but warned that they should be selective in picking the funds. "You should check their management, network and the liquidity of their products," he said.

Intru Nusantara claims its fund achieved an annual return of more than 38 percent for 1997, which is higher than the average annual return of 24 percent offered by rupiah time deposits. The company is strongly backed by PT Makindo Securities, the largest securities operation in the country, which has put some Rp 10 billion in the funds.

Agus admitted that the funds' 25 percent investment in the stock market had been a good strategy in achieving the high return.

What about property? Haas would not recommend the sector saying that it would take at least two years for the sector to turn around. "For stocks, it could take only months," he said.

And U.S. dollar time deposits? "The yield would not be optimum," Haas said, adding that the rupiah has to strengthen.

And rupiah time deposits? "There's an inflationary issue," he pointed out, adding that investors would still make more money out of stocks in a high inflation environment.