Focus on main growth engines, domestic consumption
Indonesia’s financial sector has not been spared the global uncertainties and adverse external developments that have rattled equity markets worldwide. Nevertheless, the country’s economy has stayed relatively resilient, thanks largely to its heavy reliance on domestic consumption. That said, we are optimistic that corporate earnings growth will continue to remain robust and the upbeat momentum from the prior years will endure, although this time only the industries which have relatively bigger exposure to domestic demand will fare better than the others.
In this context, we believe the Jakarta Composite Index (JCI) will chalk up more positive performance in 2012, thus justifying the benchmark’s well-deserved premium valuation compared to its regional peers. The possibility of an upgrade in Indonesia’s credit rating to investment grade will be strong testament to the country’s solid fundamentals, which would be the magnet for more investments.
Economic growth robust; inflation the wild card
Being a domestically-driven economy should provide a buffer of sorts for the country in facing external headwinds; hence we expect the economy to expand by 6.1% in 2012, which is not significantly far from Bank Indonesia (BI) estimates. On the flip side, we see inflation remaining elevated in 2012 at around 6% owing to both demand-pull and cost-push factors.
Another factor is BI’s recent aggressive reference rate cut, which might potentially derail current inflation expectations and lead to further rupiah weakness, could in turn exacerbate inflationary pressures, thereby creating a feedback loop effect.
Government’s hand also a wild card
Two major developments in relation to government policy were the proposed Land Clearing Bill and the government’s decision to reduce fuel subsidies. The former will, if enacted, will make a huge impact on infrastructure development and potentially stoke rapid economic growth, while the latter would have the effect of elevating inflation.
Going into 2012, it is still unclear when parliament will vote on the proposed but expectations of this materialising in 1Q12 seem realistic based on recent developments. The bill will have a significant impact on the economy, especially in terms of earnings for several related industries. Hence, the progress of the bill and its subsequent implementation will have a huge bearing on the market’s direction in 2012.
More upside for JCI in 2012
Based on our bottom-up approach for our stock coverage universe, our year-end JCI target for 2012 is 4,450 pts, premised on 14.8x FY12f earnings. This also offers a 19% upside potential from the current level (based on a close on 18 Nov 2011). We estimate that total earnings will grow by 16% y-o-y in 2012 from 21% y-o-y in 2011. At this juncture, we are of the view that sector preference and stock picking will be crucial for the upcoming year, as stock valuations are at a relative premium versus regional peers while earnings growth acceleration will not be even across the board.
Consumer and infrastructure the key sectors
Underpinned by a domestic consumption, these two broad sectors will be the key winners. This will come the form of robust revenue growth for corporations in the consumer and infrastructure space. Infrastructure-related counters are attractive as they will be supported by a potentially higher number of developments being planned by the government in the upcoming years.
Rising consumer confidence as well as a low interest rate environment will stimulate robust growth in the consumer sector, which in turn makes infrastructure developments more critically needed than ever.