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Regional Equity Strategy Q4 2007
Country Assessment
Indonesia
JCI Current : 2,223.2
Stick to fundamentals JCI 3 / 12 mths Target : 2,300 /2,600
Expected Return : 3.5% / 17%
• 3Q07 was not a favorable period for financial markets as US sub-prime mortgage
concerns shook world markets in early Aug 2007. The JCI fell 20% from its historic high
in only three weeks. In the last two months, the recent turmoil had caused volatility in
the financial market. We expect a rally in the equity market once investors get a clearer
picture of the impact of sub-prime mortgages on the Indonesian economy.
• From the 2Q07 GDP data, we observe that domestic demand seems to have
benefited from the falling interest rate environment. However, we expect only one
more BI rate cut this year due to inflationary pressures in the last two months, led by
food prices, energy and seasonal factors as we approach the Eid festival and Christmas
in December.
• On the other hand, we expect more fiscal stimulus in 2008, as the 2008 Budget is
more expansionary with a focus on national infrastructure development and welfare
programs. This is the government’s first move to improve national infrastructure, which
had been ignored since the economic crisis. Going forward, we do not expect a slowing
US economy to have a significant impact on Indonesia, as trade between Indonesia and
the US is relatively small.
• For 4Q07, we like sectors with exposure to domestic demand, which will cushion
against a slowdown in the US economy. But in anticipation of continued volatility in the
next two quarters, we will be selective in our stock picks. In addition, the JCI is no
longer cheap compared to regional markets based on equity risk premium (ERP)
analysis. We remain Overweight on Banking, Consumer and Cement & Construction
sectors. We upgraded Automotive and Plantation sectors to Overweight, but remain
Neutral on Property, Basic Material, and Telecommunication sectors.
Chg net % Change 52 wegk
Close
Index 17-Sep- 07 -1mth -1mth -3mth -6mth -12mth High Low
JCI 2,223.2 28.9 1.3 2.6 21.8 44.9 2,401.1 1,500.1
LQ45 465.1 7.2 1.6 3.5 19.4 38.2 499.9 330.9
Consumer 409.0 (6.5) (1.6) (6.4) 6.2 19.0 466.8 338.0
Finance 232.8 (1.6) (0.7) 2.6 18.3 29.1 259.0 174.4
Infrastructure 805.6 (0.7) (0.1) 6.5 10.7 20.9 839.1 643.8
Manufacturing 339.7 3.6 1.1 0.6 24.0 40.2 372.3 240.2
Property 228.6 3.0 1.3 6.3 59.9 172.9 255.5 79.5
Mining 1,799.4 149.6 9.1 5.4 34.2 136.7 1,851.9 752.0
Transactions YTD
Volume (bn) 696.2
Value (IDRtr) 608.5
Source: JSX
Agus Pramono, CFA · (021) 3983 2668· agus.pramono@id.dbsvickers.com
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Refer to important disclosures at the end of this report