The Wall Street Journal-20080213-Indonesia Offers Solace from Stress- Robust Economy May Be a Hedge Against Global Woes
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Indonesia Offers Solace from Stress; Robust Economy May Be a Hedge Against Global Woes
Full Text (874 words)Jakarta, Indonesia -- For investors looking for a hedge amid global economic worries, Indonesia's stock market may be worth a look, many analysts say.
The Jakarta Stock Exchange's Composite Index has slipped 5.6% this year, roughly tracking U.S. stock indexes. But the outlook for Indonesia's economy, Southeast Asia's largest, remains robust and relatively unaffected by problems related to subprime loans.
That makes Indonesia, like neighboring resource-rich Malaysia, a Southeast Asian country where resilient growth could make certain stocks attractive.
The reason: Indonesia's stock market is weighted toward the domestic economy, with the telecommunications and banking sectors accounting for nearly half the market's total capitalization. Manufacturers, which would be most directly affected by a U.S. slowdown, are largely unlisted. And shipments to the U.S. -- mainly textiles, garments and shoes -- account for only 11% of the nation's total exports.
Even the export sector is relatively insulated against knocks from a sluggish U.S., as nearly two-thirds of Indonesia's total exports are commodities, such are coal, nickel, plywood and palm oil. Huge demand from China and India has continued to prop up commodity prices, aiding Indonesian growth.
"Indonesia is relatively immune to external shocks," says David Fergusson, head of Indonesian research at Citigroup Global Markets.
Most economists forecast 6.5% growth in gross domestic product this year, in line with government forecasts, after 2007 expansion of 6.2%. Some economists have trimmed growth targets to about 6.2% because of jitters in the U.S., but that is still a healthy rate during economic turbulence.
One reason for the optimism, according to some economists, is that Indonesia is still in the early stages of a capital-investment cycle, after remaining stagnant for many years following the 1997-98 Asian financial crisis. The corporate sector hasn't taken on large amounts of debt, and banks are awash with cash to lend, which optimists argue is likely to support investment and consumer spending.
"We expect Indonesia to enter a robust consumption phase in 2008," says Joshua Tanja, head of Indonesia research for UBS.
The government also is planning to spend 61.9 trillion rupiah ($6.67 billion) this year to improve the country's decrepit ports, roads and rail network, giving a further boost to investment. And foreign direct investment more than doubled last year from 2006, to $10.34 billion.
The Composite Index closed yesterday at 2592.07, down from 2745.83 at the end of 2007. Last year, the index climbed 52%.
Other Asian markets generally have fared worse than Indonesia this year. India's benchmark Sensex and Hong Kong's Hang Seng Index each has shed 18%.
Indonesia's economy could stumble if high global oil prices fuel domestic inflationary pressure. Despite being a member of the Organization of Petroleum Exporting Countries, Indonesia is a net importer of refined oil products and susceptible to cost-push inflation, that is, rising prices on the heels of rising costs.
Interest rates also are a question mark. Lower rates last year underpinned the economy's strong growth. For now, the benchmark rate is stable at 8%. But the central bank could be forced to increase rates this year if oil prices rise further, crimping domestic demand, many economists say.
Indonesian bulls say investors should buy shares that are largely insulated from the U.S. economy and those that could benefit from higher oil prices.
Their favorites include Bank Rakyat, oil producer Medco Energy, state-controlled Telekomunikasi Indonesia and Semen Gresik, a cement company.
State-controlled Bank Rakyat makes two-thirds of its loans to small borrowers, mainly in the agricultural sector. Many analysts expect the bank to do well amid growth in rural spending during the next 12 months, in line with higher commodity prices.
Medco Energy, which has oil and gas operations in Indonesia and Libya, "is a direct beneficiary of high oil prices," says DBS Vickers Securities Indonesia strategist Agus Purnomo.
Indonesia's telecom sector, meanwhile, should do well as consumer spending continues to increase. Citibank projects consumption will rise 5.4% this year, compared with 4.7% last year. Only one in three of Indonesia's 240 million citizens owns a mobile phone, a much lower level than in the Philippines, where 60% of the population has a cellphone.
Many analysts recommend Telkom, which has a 65% stake in Telkomsel, the nation's dominant cellphone provider.
European Shares Rise,
Boosted by Buffett
Billionaire investor Warren Buffett's offer to bail out troubled bond insurers helped allay fears of further immediate subprime pain, propelling European stocks higher.
Asian stocks mostly gained, too, as investors sought out bargains after a string of losses.
Mike Lenhoff, chief strategist at Brewin Dolphin in London, said of Mr. Buffett's move: "It provides some relief. It's a welcome sign, even if it isn't related to the more vulnerable parts of the corporate-bond market exposed to default risk."
In LONDON, the FTSE 100 Index rose 3.5% to 5910.0. Insurers, which had tumbled Monday and early yesterday, posted gains. Legal & General rose 5.8%, Prudential PLC added 5.5% and Royal & Sun Alliance gained 4.4%.
In TOKYO, the Nikkei Stock Average of 225 companies edged up 0.04% to 13021.96. Banking and financial shares -- which didn't factor in the bond-insurer news -- remained weak.
In MEXICO CITY, the IPC stock index climbed 0.3% to 28869.96.
Chinese mainland stock markets were closed for the last day of the Lunar New Year holidays.
