Market reforms key to sustaining Indonesian bull market

Written by by Kevin Plumberg & Tyagita Silka (Reuters)
Tuesday, 18 August 2009 12:12

HONG KONG/JAKARTA: Indonesia must add depth and liquidity to its stock and bond markets if they are to have any chance to extend the first half’s remarkable bull run in the second half of the year.Value can still be found in resource-related and the telecommunications industries, but policy credibility will be key for sustained returns, given waning global enthusiasm for equities and emerging market bonds and domestic inflation expected to pick up next year.

The government spent the better part of the last 12 months making monetary conditions growth-friendly and helping to stabilise markets.After last month’s landslide election win by President Susilo Bambang Yudhoyono, the government is now trying to secure sustained growth, in part by planning to list state-run firms and spending around 5% of its 2010 budget on infrastructure.

Investors are optimistic about Indonesia’s growth prospects, but sceptical whether anything will be done in the near term to expand markets and remove liquidity barriers to entry of more international investors.

“The market is waiting to see if they have the will-power to implement the reforms,” said Pong Ho Yin, who oversees a portfolio of Indonesian equities for RCM, a unit of Allianz in Hong Kong, with total net assets of around US$32 million (RM113.6 million).

“The divestment of government companies involves a lot of political issues. For now I’m rather lukewarm on floating public sector companies,” he said.Indonesian stocks, bonds and currency were Asia’s star performers in the first half of the year, buoyed by the consumption-driven economy’s resilience to the global crisis, its good growth prospects, handsome bond yields and a broad revival in risk appetite.

RCM’s Indonesia-A-USD fund was up 79.1% in the first six months of 2009, the fourth best year-to-date performing fund among those tracked by Thomson Reuters Lipper.Overall, on a 90-day rolling basis, Indonesian stocks lead Asia, with a 60% gain.Pong, whose fund is heavily weighted towards the financial sector, said there was evidence of “overshooting” in valuations of banks and cement stocks based on hopes for continued growth in consumer spending and building.

However, he still found some value in telecommunications stocks, because of the local market’s wireless potential.Yet the market’s relatively modest size threatens to become a deterrent to more investment.

International Monetary Fund forecasts Indonesia will grow at the third-fastest rate among 20 major economies in 2009 and 2010, but its stock market capitalisation is one of the smallest in Asia relative to gross domestic product.

“The market cap in Indonesia is still too low. It still doesn’t reflect the potential,” said Desmond Tjiang, chief investment officer for Asia ex-Japan at Fortis Investments in Hong Kong.Jakarta’s top 20 most actively traded stocks made up 74% of total trading volume in July, making liquidity one of the biggest challenges for foreign investors entering the Indonesian market.

Ito Warsito, the head of the Indonesia Stock Exchange, told Reuters he would like to double the stock market value in three years, in part through IPOs of state-owned companies as well as the Indonesian units of US mining giants Freeport McMoRan Copper & Gold Inc and Newmont Mining CorpParliament has approved the listing of several firms such as steelmaker Krakatau Steel and home lender Bank Tabungan Negara, but listings are still on hold this year. — Reuters