Jamsostek to Purchase More Bonds as Stock Gains Slow

PT Jaminan Sosial Tenaga Kerja, Indonesia’s state-pension fund, plans to increase its allocation to bonds this year to benefit from rising yields and as gains in the stock market slow. 

The fund, which has about $11 billion of assets, will raise fixed-income holdings to at least 44 percent of total investments from 41 percent, and keep equities at up to 22 percent, Investment Director Elvyn Masassya said in an interview in Jakarta yesterday. 

A 50 basis-point increase in interest rates may be enough to cope with faster inflation and the Jakarta Composite Index may end the year as much as 21 percent higher, he said. The gauge gained 46 percent last year. 

“Once the central bank does the adjustment in terms of interest rates, the coupon rate for bonds will increase,” said Masassya, who prefers to buy bonds with a maturity of five years and longer. Policy makers “must do the adjustment to control the inflation rate and also convince investors that the central bank is doing the right thing in terms of monetary policy.” 

Bank Indonesia kept its policy rate at a record low of 6.5 percent after a Jan. 5 policy meeting even as consumer prices rose at the fastest pace in 20 months in December. 

Ten-year government bonds have lost 3.9 percent this year and the benchmark stock index dropped 3.7 percent on concern inflation will accelerate. Consumer prices rose to 6.96 percent in December from a year earlier, exceeding the 6.71 percent median estimate in a Bloomberg survey. 

Bond, Stock Returns

The yield on the 8.25 percent note due July 2021 reached 8.47 percent on Jan. 11, the highest level since July 2010, according to prices from the Inter Dealer Market Association.

Rupiah-denominated bonds returned 21 percent and the Jakarta Composite Index soared 46 percent last year, the best performances among Asia’s biggest markets outside of Japan. Indonesia’s economy, Southeast Asia’s largest, escaped a recession during the 2009 global slowdown. 

President Susilo Bambang Yudhoyono is targeting annual growth of 6.6 percent on average through the remainder of his term ending in 2014. Bank Indonesia forecast the economy will expand by as much as 6.5 percent this year from an estimated 6 percent in 2010. 

The central bank may raise its benchmark policy rate by 100 basis points between March and August, Credit Suisse AG said in a Jan. 11 report. This means gross domestic product in 2012 will expand an average 5.5 percent, lower than economists’ estimates and “potentially a big disappointment relative to the government’s ambitious aims,” Credit Suisse analysts led by Robert Prior-Wandesforde said in the report. 

Record High

The Jakarta Composite Index rose to a record 3,786.10 on Dec. 9 as low interest rates drove domestic spending, boosting shares such as PT Astra International, the nation’s biggest automotive retailer and the largest company by market value. The stock climbed 57 percent last year.

Gains in Indonesian stocks may slow this year as valuations rise, Masassya said. Once shares trade at 18 to 19 times earnings the “upside will be limited,” he said. Companies in the Jakarta Composite trade at an average 14.2 times estimated profit, data compiled by Bloomberg show. 

A central bank interest-rate increase of 50 basis points to stem inflation won’t hurt the attractiveness of equities, he said, adding the index may end the year at 4,200 to 4,300 points. That’s an increase of as much as 21 percent from the gauge’s closing level of 3,564.94 yesterday. 

Mining, Agriculture

Jamsostek, as the pension fund is known, isn’t allowed to invest overseas directly and expects its assets to grow to 115 trillion rupiah ($12.7 billion) in 2011 from 98.5 trillion rupiah last year, according to Masassya. 

Masassya said he likes stocks in the mining, agriculture, and basic industries groups, citing rising demand for commodities and expectations that infrastructure spending will pick up this year. He also likes financial stocks as banks have room to boost lending even as Bank Indonesia moves to increase borrowing costs this year. 

“Don’t forget higher inflation means higher growth,” he said. “I still believe economic growth this year could be more than 6.5 percent, driven by consumption and investments.” Source: Bloomberg