Indonesia stocks seen extending Asia's worst drop on growth risk

[JAKARTA] The lowest Indonesian stock valuations in six years aren't cheap enough for Samsung Asset Management Ltd. and Standard Chartered Plc as the economy slows and the U.S. gets ready to raise borrowing costs.

The Jakarta Composite Index has dropped 12 per cent from its April 7 record high, the biggest retreat among Asian benchmark stock gauges and dragging its price-to-book ratio to the cheapest since July 2009.

President Joko Widodo is struggling to push through much- needed spending plans to revitalize the economy, while the weakest currency in 17 years is limiting scope for the central bank to cut interest rates. The Jakarta Composite needs to fall a further 17 per cent before shares become attractive enough to consider buying, said Alan Richardson, who helps manage about US$112 billion as a money manager at Samsung.

Indonesian stocks will "trend down in the short term until the first US rate increase," said Hong Kong-based Richardson, whose Samsung Asean Equity Fund beat 96 per cent of its peers with a 14.3 per cent return over five years. "Demand for dollar liquidity is negative for risk assets in Indonesia and the problem is compounded by a slowing growth outlook for the rest of this year." Gross domestic product grew 4.67 per cent in the second quarter, the weakest pace since September 2009, the government said Wednesday. Second-quarter net income has fallen at 57 per cent of companies tracked by Bloomberg that have reported earnings so far.

Southeast Asian markets were among the biggest beneficiaries of Federal Reserve stimulus as investors sought riskier assets. Stock indexes in Indonesia, Thailand and the Philippines surged more than 200 per cent in the six years through 2014.

Indonesia's benchmark gauge trades at 2.4 times net assets. While that's down from its 2010 high of 3.4 times, it's still 64 per cent more expensive than the MSCI Emerging Markets Index. The Jakarta Composite gained 0.2 per cent to 4,859.59 as of 9:12 am in Jakarta.

Jokowi's government has turned to tweaks in taxes and regulations in an effort to revive the economy as state spending falls behind and growth remains well below his target of at least 7 per cent growth. Government expenditure rose 2.3 per cent in the last three months from a year earlier, compared with 2.7 per cent in the first quarter.

The performance of Indonesian stocks is dependent on Jokowi's ability to drive through economic reforms, according to Mark Mobius, chairman of the emerging markets group at Franklin Templeton Investments.

"He is very weak on the political front; he doesn't have the support of his own party," Mobius said in an interview on Wednesday. Investors shouldn't expect to see the results of the president's reforms "anytime soon," he said.

When it comes to tighter American monetary policy, Indonesia's economy is in better shape to handle the fallout than two years ago, according to UBS Wealth Management. The Jakarta Composite dropped more than 20 per cent after then-Fed Chairman Ben Bernanke said in 2013 that the US was considering tapering bond purchases.

The Fed will raise interest rates in September, according to 48 per cent of analysts surveyed by Bloomberg News.

"Macroeconomic fundamentals have improved since the taper tantrum of mid-2013" thanks to lower oil prices, while stock valuations are now "fair," said Kelvin Tay, Singapore-based regional chief investment officer at UBS Wealth Management.

Brent crude has tumbled 21 per cent this year, reducing the cost of government fuel subsidies and helping to lower inflation. Indonesia's consumer-price growth slowed to 7.26 per cent in July from 8.36 per cent in December.

Tay recommends buying construction stocks and banks, saying falling inflation will help boost government spending on infrastructure over the longer term.

For Standard Chartered, high borrowing costs and risks to earnings make the nation's stocks unappealing.

Indonesia's benchmark interest rate is 7.5 per cent, near a six-year high. The rupiah dropped more than 8 per cent this year, the second worst-performer in Asia after Malaysia's ringgit.

"We do not have a high conviction on Indonesian equities at current levels," said Tariq Ali, investment strategist for Standard Chartered in Singapore. "Earnings are still being revised down and growth remains lackluster. Real interest rates remain high, and policymakers are unlikely to ease policy rates before the Fed rate hike."

BLOOMBERG