Jakarta Stocks Index Will Reach 3.700 Short Term, Citigroup Says

Indonesia’s Jakarta Composite Index may be reaching a peak in its valuations with “buying momentum” likely to lift the measure by a further 6.5 percent before share prices decline, according to Citigroup Inc. 

The gauge may rise to 3,700 in the short-term based on an estimated valuation of two standard deviations above its average over the past six years, analysts led by Alex Wreksoremboko said in a report yesterday. 

A “more sustainable” medium-term valuation would be one standard deviation higher at about 14 times estimated earnings, which translates into a level of 3,400 for the benchmark, according to the brokerage. 

The Jakarta Composite yesterday climbed 0.1 percent to a record high of 3,472.71. The index’s rally of 37 percent this year means that Indonesia, the best performer among the 15 largest Asia-Pacific markets, is now valued at about 14.2 times estimated earnings for 2011, according to Citigroup estimates. 

“Whilst the Indonesia market did trade at this kind of valuation before the 1998 Asian financial crisis, the market is now in unchartered territory,” the analyst said. “We would argue that the Jakarta Composite Index is approaching peak valuation and may exhibit short-term weakness.” 

Still, the Indonesian stock index may climb over the next three to six months before valuations become “very challenging,” mirroring the performance of Brazil’s Bovespa index in the two years following the 2006 presidential elections, according to the report.

Indonesia, Brazil 

“In addition to the high degree of similarity between the Brazilian and Indonesia economies, Indonesia in 2010 is at a very similar stage of political development to Brazil in 2007 to 2008,” before the global financial crisis, Wreksoremboko said. 

The Bovespa climbed as much as 78 percent between October 2006, when Luiz Inacio Lula da Silva was re-elected to a second term as president, and May 2008, when it reached its peak. The measure then fell as much as 60 percent to a low in October that year. 

In Indonesia, the Jakarta Composite has rallied 67 percent since President Susilo Bambang Yudhoyono won his second term in July last year. 

“Superimposing the Jakarta Composite against the Bovespa with the announcement of the election results as the point of intersection returns a very interesting result,” the Citigroup analyst said. “The two charts showed a high degree of correlation” of around 90 percent. 

The similarities between the two indexes also extend to the highs and lows for their valuations, with both measures peaking at around 2 standard deviations above their average over the past six years, according to Citigroup. This may imply that the Indonesian market’s multiple may climb near 15.7 times estimated earnings, the analyst said.Source: Bloomberg