For the Indonesian equity market, the sky is the limit
or the Indonesian equity market, the sky is the limit. The nation's biggest fund managers say that local stocks are likely to sustain a strong rally next year despite their already expensive valuations.
The Jakarta Composite Index (JCI) may touch 6,000 next year on the back of strong earning growth among local corporations, according to UK-based Schroders Plc, the largest mutual-fund manager in Indonesia.
Canada-based Manulife, the country's second-largest fund manager, forecast the index to hit between 5,900 and 6,200 by the end of 2015, as reforms undertaken by President Joko 'Jokowi' Widodo would benefit local publicly listed companies.
'We like equities now more than bonds,' said Michael T. Tjoajadi, the chief executive officer of Schroder Investment Management Indonesia, who supervises around US$4.6 billion in assets.
'To some extent, some sectors are already expensive, but, although they are already expensive, we expect the growth [of corporate earnings] to be higher,' he said on Wednesday.
The JCI closed at 5,133 on Wednesday, 0.27 percent higher than a day earlier. The index has gained 20 percent this year.
Foreign investors have posted a net buy of Rp 50 trillion ($4.1 billion) in the Indonesian equity market this year to date. The average price-to-earnings ratio (PER), an indicator of a market's valuation, currently stands at 16.1, among the most expensive in the region.
Michael said that he favored stocks in infrastructure, banking, media and telecommunications industries. Schroders would avoid stocks related to commodities because of the bleak outlook of global commodity prices, he said.
Outpacing the JCI's growth this year are infrastructure, utilities and transportation stocks, which gained 23.2 percent in 2014.
Property, real estate and building construction shares have advanced 46 percent this year to date, while financial services stocks have risen 33.2 percent, according to data from the Indonesia Stock Exchange.
'Industries that are related to Pak Jokowi's development vision would benefit, notably infrastructure, financing, healthcare and pharmaceuticals,' said Alvin Pattisahusiwa, chief investment officer with Manulife Asset Manajemen Indonesia, which supervises $4 billion in assets.
Last week, Finance Minister Bambang Brodjonegoro said that the government could invest up to $11.5 billion in fiscal savings from the fuel-price hike into infrastructure development.
Goldman Sachs stated this week that it would allocate more resources to the Indonesian market, upgrading the country's stocks recommendation to 'overweight' on the bright economic reform prospects. The US-based investment bank said the JCI could hit 5,800 by the end of next year.
Goldman Sachs noted that Indonesia is the only market in the region with still over 20 percent return-on-equity (ROE), which is a measurement of companies' profitability relative to shareholders investments.
'Consistently high profitability in a subdued growth environment helps support valuations,' Goldman Sachs analysts, led by Timothy Moe, wrote in a report.
There would be a 'multi-year bull run' for the Indonesia Stock Market because of the country's positive reform prospects, said John D. Rachmat, the head of equity research and strategy with state-run Mandiri Sekuritas. The index could hit 6,350 by the end of 2015, he predicted.
Grace D. Amianti
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