Avoid commodity price volatility by buying into Indonesia's 'immune' stocks: UOBKH

UOB Kay Hian (UOBKH) is recommending investors to take shelter in Indonesia's finance, retail, healthcare and technology sectors to avoid fluctuations in commodity prices, given their minimum exposure.

Noting the "skyrocketing" prices of commodities such as wheat, coal and oil since the onset of the Russia-Ukraine conflict, the research house estimates many have risen by more than 50 per cent compared to their 2021 average levels.

While commodity companies are direct beneficiaries of rising commodity prices, UOBKH has recently downgraded its consumer sector to "underweight" for its high exposure to raw materials and therefore, potential margin pressure.

"We however continue to like retailers as the business model of retailers are cost plus and retailers may only be exposed to high transport cost," said analyst Stevanus Juanda in a report on Tuesday (Mar 22).

Investors who wish to avoid volatility of commodity prices should establish positions in sectors that are immune or minimally affected, he added.

Banks are one such example as they mainly deal with financial services, although the sector faces a risk of a potential interest rate hike in H2 of 2022. Bank Negara Indonesia, Bank Tabungan Negara, Bank Mandiri and Bank Neo Commerce are UOBKH's top "buy" picks within this sector.

Another instance is the healthcare space, where healthcare service and pharmaceutical companies are also deemed immune to commodity prices. Companies in this sector however may face flat or slightly lower profitability after moderating from peak 2021 levels, said Juanda.

The analyst has highlighted pharmaceutical names such as Kalbe Farma, which he likes for its double-digit 2022 earnings growth and attractive valuation.

Telco and technology companies are also not affected by the ongoing commodity price hike, said Juanda, who believes more reasonable pricing and consolidation should drive these sectors' earnings growth ahead.

Telkom Indonesia is UOBKH's top "buy" selection among telcos. Likewise, the brokerage notes that tech companies Bukalapak and GoTo are also unaffected by commodity price changes.

Going forward, Juanda foresees the current high prices of commodities could last throughout 2022 with the potential for delays in supply delivery in global markets.

"For example, it will take wheat 7 months to mature and be ready for harvesting," he said. Meanwhile, given the high oil prices, Opec might not be in a hurry to increase their production, Juanda added.

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