Indonesian Stocks Could Jump 15% This Year: Citi

The Indonesian stock market has been the worst performer in Southeast Asia this year, owing to recent declines, but Citigroup says it’s time to take advantage of the low valuations, forecasting over 15 percent upside for the country’s equities over the rest of 2012.

Indonesia's Jakarta Composite Index
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Indonesia's Jakarta Composite Index

Year-to-date, the Jakarta Composite has risen just 0.7 per

cent, a fraction of the gains seen in peers such as Thailand’s SET Index and the Philippines’ PSE Composite Index, which are up 10 and 15 percent, respectively, since the start of the year.

With the index trading at 11.3 times forward price-to-earnings, valuations - which are below their six-year average – are beginning to look compelling, says Ferry Wong, Head of Indonesian Research at Citigroup.

“At the end of last year, one of the reasons investors stayed away from the market was because valuations were expensive. The market was trading at over 13 times price-to-earnings in December,” he said. “Now, valuations look attractive.”

Indonesia was one of the top performing markets globally last year, rising over 3 percent, while many markets in Asia ended in negative territory.

In addition to offering good value, Wong says he is upbeat on the fundamentals of the Indonesian economy, which is largely driven by domestic consumption.

“Indonesian economic growth remains solid and will be among the fastest in Asia Pacific over the next two years. Our conversation with people in business community indicates things are fine - they are still spending and expanding their capacity,” he said.

He expects Indonesia’s economic expansion to remain robust this year, forecasting GDP growth to touch 6.2-6.3 percent in 2012.

Increased Domestic Participation

According to Wong, another upside driver for Indonesian stocks is increased participation by domestic investors as they move their money out of bank deposits and into stocks in search of better returns.

“Domestic investor participation has started to increase because of the low interest rate environment. Deposit rates used to be high, but now the official deposit rate is at 6.25 percent. This is much lower than the deposit rate of 10 percent 5-6 years ago,” he said.

Wong says the Jakarta Composite Index’s drop below 4,000 in May led more local investors to buy into domestic mutual funds, boosting their participation in the market.