Set for another runaway year
Following a huge rally which delivered an outstanding return of 87% in 2009, the Jakarta Composite Index (JCI) stretched its uptrend with another buoyant return of 46% in 2010. The key drivers of the rally were robust economic growth, strong corporate earnings, a higher market profile and the wave of liquidity flowing into the market.
Having said that, we believe that there is plenty of strength left in the market to surge further in 2011, buoyed by strong economic growth and Indonesia’s growing investment profile. With expectations of continuing robust growth in 2011, corporate earnings are also poised for healthy growth.
Growth to remain strong amid inflation risk
For 2011, we forecast a GDP growth of 6.2%, driven by private consumption growth of 5.3%, an expected boost from investment expenditure and to a lesser extent, net exports. Consumer spending will continue to be the defining backbone for overall GDP owing to its contribution of more than 60%. On the other hand, inflation will also rise in 2011 to 6.5% amidst likely higher commodity, food and fuel prices, and potentially gas price adjustments that might take place in the latter half of 2011.
These should be addressed prudently without causing the consumer-driven engine for economic growth to stall. Therefore, it is critical for the government to hasten the pace of disbursing funds and beef up investment expenditure on basic infrastructure projects to increase transportation and distribution efficiency. In the meantime, in its inflation-targeting framework, we estimate that Bank Indonesia is likely to hike interest rates from Q3 by 100bps to 7.5% by year-end, in line with our forecast of higher inflation in H211.
Improving investment profile
The inflow of funds from foreign investors into Indonesia’s treasury bonds (SUN) and equity market have been the key drivers of the strong market performance. Foreign ownership in SUN stood at Rp195trn as of 17 Dec’10, representing an additional Rp87tn during the year (+80%), which has in turn driven yields significantly lower.
Such conditions have created a low interest rate environment, which translates into low funding costs, which is positive for corporate expansion. Encouraging economic conditions and expectations of a rating upgrade for Indonesia have been the key factors, in our view. In the equity market, foreign investors had a net-buy position of Rp2trn as of Nov 2010 on the back of solid earnings and strong growth momentum.
JCI still offers 25% upside potential
Despite chalking up one of the region’s best performances with a total return of 41% in 2010, we believe the JCI still offers attractive upside for 2011. With an estimated earnings growth of 15%, we forecast an index target of 4,530 pts for 2011, implying a PER of 18x and 16x 2011F-2012F respectively.
With domestic consumption growth being the key investment theme for 2011, we have overweight calls on the Banking, Coal, and Cement sectors. We are confident that these three sectors will outperform due to their attractive market structures and quality earnings growth. Our top picks are mainly from sectors in which we have an overweight view. However, we also like names in other sectors, in which we believe that individual specific factors might elevate those stock picks above their peers within their respective sectors.