Q+A-Indonesia stock sell-off: another crisis or profit-taking?

Indonesia's stock market has slid 7 percent in the past five trading sessions to a 3-month low on worries over inflation, though the sell-off is likely to be limited as most analysts remain positive on the country's fundamentals.

Here are some questions and answers on the sell-off.

WHY ARE INDONESIAN STOCKS SLIDING SO MUCH?
Investors are worried about accelerating inflation, which hit a 20-month high in December, and are concerned the central bank may be behind the curve in dealing with a problem that has in the past led to sudden capital outflows.

Economists have been calling for the past year for Bank Indonesia to start normalising its prime interest rate, slashed to a record low of 6.5 percent during the financial crisis, to head off inflationary pressures caused by higher food and energy prices.

Analysts say if Bank Indonesia does not move soon it may be forced to hike rates aggressively later in the year, which would slow the economy. Growing inflation worries are widespread, but regional peers have already started hiking rates.

Indonesian stocks were also richly priced after a rally to a record last week, so many investors likely have been taking profits. The index gained 46 percent last year, led by consumer stocks -- tyre maker Gajah Tunggal soared five-fold.

Indonesian stocks now trade at an average 12-month forward price-to-earnings multiple of 14.1 times, versus Thailand's 12.1, Thomson Reuters I/B/E/S data showed.
Indonesia's current valuation is higher than its average of the past two years of 12.8 times.



WHAT SECTORS ARE HIT THE HARDEST AND WHY?
Banks were the hardest hit, since steep rate hikes could slow lending growth rates that have been above 20 percent in the past year as businesses took on more debt for expansion and an emerging middle class bought record numbers of new cars.

In a rising rate environment, banks with strong deposit franchises such as Bank Negara Indonesia , Bank Mandiri and Bank Central Asia would be relative beneficiaries given their structurally low funding costs that would minimise the impact on margins, said Teguh Hartanto, deputy head of research at brokerage Bahana Securities.

However this week, BNI and BCA saw the heaviest losses, down 10 and 11 percent respectively, while Bank Danamon rose 1 percent. BCA is still priced at over 5 times book value, versus 1.4 times for regional leader DBS Group .

Consumer stocks also fell but less severely, with Gajah Tunggal down 4.5 percent and telecoms firm Indosat down 6.5 percent this week.

HOW HAVE INDONESIAN STOCKS REACTED TO PAST INFLATION?

In 1990, inflation hit a eight-year high of 9.5 percent, leading the central bank to tighten monetary policy with one-month deposit rates at 23 percent. The fledging stock market slid from a peak in April 1990 to halve by the following year. 

The index took four years to recover, but did so even with inflation near 10 percent, as the central bank loosened policy to spur growth and as funds poured money into emerging markets. 

Inflation in 2005 and 2008 from higher oil and commodity prices also led to sharp stock sell-offs. In 2008 the central bank hiked rates by 150 basis points to counter inflation that hit 12 percent in September, and the index again halved in value that year, even before the Lehman collapse rocked world markets. 

WILL THIS TIME BE DIFFERENT?

Yes -- for now. The sell-off is likely to be limited as most analysts are still positive on the long-term fundamentals -- growing local consumption and resources exports -- while loose Western monetary policy means there is ample global liquidity. 

Indonesian banks are much better capitalised than in the Asian financial crisis in 1997/1998, when many went bust, government debt has slid, foreign reserves have jumped to better handle any currency weakness, and direct investment is rising. 

Johanna Chua, chief Asia economist at Citigroup, sees Indonesian stocks going sideways this quarter and temporary volatility until investors see a change in the central bank's stance, though assuming that happens gains are still seen in 2011. 

Chua Hak Bin, director of global research at Bank of America Merrill Lynch, also said the sell-off was probably not a one-off and foreign investors will remain nervous with the fight against inflation having just begun.

Investors will increasingly look for value, with the index rebounding 2 percent on Wednesday. Fund manager Winston Sual of Panin Securities said he had been a net buyer in recent days, as he saw fundamentals intact and the recent correction as healthy.

Many investors hope for rating agencies to lift Indonesia in the next year to investment grade, which would spur renewed fund flows to bonds and stocks. Source: Reuters