Investor sentiment in Indonesia to remain muted until Fed rate hike: DBS Group Research

INVESTOR sentiment could remain muted in the near term due to the rising Covid-19 cases in Indonesia and the uncertainty of the US Federal Reserve's tightening policy, said DBS Group Research.

In a research report dated Feb 2, the research house said the Jakarta Composite Index (JCI) is likely to "tread water" despite expectations of a better outlook in 2022. It maintains its JCI target of 7,000 for 2022.

It also believes the overall equity market to be volatile, as upside could be hampered by the looming Fed rate hike and tightening.

As Indonesia is an emerging market, DBS sees that it is difficult for the country to fight the Fed and expects investors to be more cautious until the Fed officially hikes the interest rate.

DBS believes there is a risk of further Covid-19 restrictions which may impact recovery in Q1 2022 as well. Its concerns arise as daily cases in Indonesia exceeded 10,000 per day in January 2022 and cases are expected to continue to increase in February.

This comes after the JCI did not get the "boost" in January that DBS had expected and maintained relatively flat at around a 6,600 level.

However, despite the muted market sentiment in the short term, the research house is of the opinion that investors could use any market correction to accumulate Indonesian stocks at good earnings and cheaper valuations and has categorised the stocks into different themes.

A potential theme that DBS said investors could ride on is the positive momentum of commodity prices. With cheaper valuation of energy stocks and the reduced regulatory issues for coal and crude palm oil, commodity prices could be a "play on the inflation theme", DBS added. The research house recommends stocks with a strong earnings momentum in H1 2022 driven by the strong commodity prices.

DBS projects that the JCI can therefore increase in the long term supported by the recovery and growth outlook in H2 2022.

DBS also highlighted that investors could benefit from stocks with strong FY2021 earnings and above-inflation dividend yields of 5 per cent or more as these shares offer good dividends on the back of strong earnings and cash balance.

Additionally, DBS said investors can accumulate stocks in big Indonesian banks as rate hikes could have a positive impact on net interest margins. With the ample liquidity of the banks, it is not necessary to adjust deposit rates immediately, allowing the NIM (net interest margin) to remain healthy, DBS added.

Property stocks which have corrected to below mean valuation could be an option for investors looking for laggards in the reopening in 2022, the research house noted. DBS expects a risk of a higher interest rate but pointed out that Indonesia's interest rate is currently at an all-time low.