Indonesia Stock Rally Depends on Oil Price, Danareksa Says

Indonesian stocks depend on a drop in oil prices to extend a rally that has driven the benchmark index to a seven-week high, the nation’s top brokerage said. 

The Jakarta Composite index may climb further provided corporate earnings weather higher fuel costs exacerbated by government restrictions on the sale of subsidized fuel, according to Chandra Pasaribu, head of equity research at PT Danareksa Sekuritas, voted Indonesia’s best domestic brokerage in 2010 by Finance Asia magazine. 

The stock gauge has climbed 6.5 percent from a four-month low on Jan. 24 after data showed February inflation eased. The central bank kept interest rates unchanged on March 4 while highlighting rising price pressures. Middle East tensions have driven oil prices to a 29-month high, threatening to raise expenses for Indonesia, which imports about 47 percent of its fuel, according to data from state oil company PT Pertamina. 

“The market needs to overcome two hurdles, namely the fuel subsidy limits and the price of oil,” Jakarta-based Pasaribu said in an interview last week. “People need time to digest before deciding whether the negative impact of the subsidy cuts justifies the market valuation.” 

The Jakarta Composite rose 0.5 percent to 3,561.72 as of the 4 p.m. local-time close. The gauge’s shares trade at an average 14 times estimated profit, within 10 percent of the lowest level since May, data compiled by Bloomberg show. Valuations may increase to 15 times by the end of the year, said Pasaribu, who declined to give an index target.

Valuations May Rise 

He recommends buying PT Bank Rakyat Indonesia, PT Bank Danamon Indonesia and PT Indofood Sukses Makmur, which owns Indonesia’s biggest instant-noodle maker. 

Oil futures have surged 16 percent this year, threatening to increase fuel subsidy costs at a time when Indonesia plans more infrastructure spending to boost growth. President Susilo Bambang Yudhoyono has pledged to double infrastructure spending to $140 billion during his second five-year term to deliver average growth of 6.6 percent. 

Curbing subsidized fuel consumption may help the country cut subsidy spending in the state budget by 8.9 percent, Yudhoyono said in August. Fuel subsidies now account for 11.5 percent of government spending, official data show. 

Owners of private cars will be barred from buying subsidized diesel and gasoline in Jakarta and surrounding areas, Evita Legowo, the Energy Ministry’s director general of oil and gas, said in December. 

‘Long-Term Confidence’

The government has subsidized fuel prices since the 1950s to lower living costs for Indonesians, 29 percent of whom live on less than $2 a day. The price for Pertamina’s unsubsidized Pertamax fuel is between 8,100 and 10,450 rupiah a liter as of March 1 depending on location, according to data on the company’s website. Its subsidized fuel, known as Premium, is sold at 4,500 rupiah a liter nationwide. 

“There’s short-term cautiousness but long-term confidence in the Indonesian economy,” Pasaribu said. “Our economy is quite attractive to provide an upside potential for stocks.”

Moody’s Investors Service in January raised Indonesia’s credit rating to the highest level since the 1997 Asian financial crisis, citing “economic resilience” and improving public debt. Moody’s Ba1 rating is one step below investment grade. Indonesia’s economy grew 6.9 percent in the fourth quarter, the fastest pace in six years. 

Pasaribu hadn’t changed his views on Indonesian equities following Bank Indonesia’s March 4 decision to leave its benchmark reference rate at 6.75 percent, the analyst wrote in an e-mail yesterday. 

Buying Opportunity

Shares dropped this year amid concern Bank Indonesia has fallen behind its peers in raising interest rates to curb rising prices. Bank Indonesia raised the rate last month by a quarter percentage point after opting not to join counterparts from Malaysia to India in increasing borrowing costs in 2010. 

Inflation slowed to 6.84 percent in February from a year earlier, compared with 7.02 percent the previous month. Efforts to tame inflation have been sufficient and price increases will slow in the second half of the year, Deputy Governor Hartadi Sarwono said in a Feb. 24 interview. 

“Any correction in stocks caused by the market thinking that the central bank isn’t in favor of raising rates is an opportunity to enter,” Pasaribu said. “There will be pain in terms of inflation. On the other hand, the government will have the money for its pro-growth policies and that’s the good news that will come out in the future.” Source: Bloomberg