Indonesian Stock Valuation Premium to More Than Double, Credit Suisse Says

Indonesia’s valuation premium to global emerging markets may more than double from current levels even after gains that drove the nation’s benchmark index to a record high, Credit Suisse Group AG said. 

The Jakarta Composite Index has surged 27 percent in dollar terms this year as the central bank kept interest rates low and economic growth accelerated, making Indonesia the best performer among the 21 countries that make up the MSCI Emerging Markets Index. The gauge yesterday climbed 0.5 percent, closing at a record high for a second day. 

The gains mean Indonesia is now trading at an 18 percent premium to global emerging markets, based on a model comparing price to book value against return on equity, Credit Suisse analysts led by Sakthi Siva wrote in a report today. 

That compares with a record premium of 22 percent reached in August 2008 and previous highs of 38 percent and 36 percent, respectively, for India and China, according to the report. 

“While we tend not to favor overvalued markets, we are 2 percent overweight Indonesia,” said Siva, the top-ranked strategist in Institutional Investor’s 2010 Asian poll. 

“There appears to be potential for Indonesia to rerate to 30 percent to 40 percent premiums if we use India and MSCI China as a guide.” 

Indonesia’s return on equity reached a low of 18.2 percent amid the global financial crisis of 2008 and 2009, according to Siva. 

That compares “favorably” with the 10 percent average for global emerging markets and tops all four of the largest developing nations of Brazil, Russia, India and China, the brokerage said. 

Economic Growth

Indonesia’s economy may have expanded 5.8 percent in the first half of this year and may grow 6 percent in the second half, the Finance Ministry said in a statement presented during a parliament hearing in Jakarta on July 26. 

Southeast Asia’s largest economy expanded 5.7 percent in the first quarter this year from a year earlier, the fastest pace since 2008.

Domestic credit to the private sector in Indonesia is 26 percent of the nation’s gross domestic product, compared with 80 percent for developing nations worldwide, the analyst wrote. 

“While proponents of the structural growth story for Indonesia tend to focus on the large young population, rapidly rising per capita GDP and domestically-led growth, we are more attracted by Indonesia’s structurally high ROE and low credit penetration,” Siva said. Source: Bloomberg