A potent combination of steep valuations and growing inflationary pressures have slammed Indonesian stocks this year, and are likely to keep the market a laggard in 2011 after two years of stellar gains.
Indonesian shares, especially in the financial sector, remain rich when looking at forward price-to-earnings, price-to-book and earnings revisions compared with other regional markets.
At record highs reached in early January, the Jakarta Composite had nearly doubled since the end of 2008 as investors flocked to the country's strong consumer-driven and resource-rich economy.
Since peaking on Jan. 6, Indonesian stocks have lost about 8 percent and have been among the hardest hit, along with India and the Philipines, as mounting price pressures and doubts about the inflation-fighting credibility of some central banks have spurred a shift into major equity markets.
Investors will probably need valuations to drop back near long-term averages and some reassurances on the inflation front before shifting more funds back to Asia's market darling of the past two years.
Indonesia's central bank surprised markets on Friday with its first interest rate rise since 2008 and most economists see three more modest increases by year-end as it tries to contain price pressures.
FINANCIAL SECTOR STILL VULNERABLE
For a chart comparing Asian country financial sector price-to-book ratios relative to their weighting in overall country indexes: link.reuters.com/xav77r
Indonesia's financials, the second-largest sector by market cap on Jakarta's main board, have been a popular play on the country's domestic consumption. Foreigners tend to like the depth of the sector, as well as its direct exposure to Bank Indonesia's policies last year to spur lending.
That trade looks squeezed dry. Looking at the five biggest financial sector stocks by market cap in emerging Asian countries, Indonesia sticks out as being expensive and highly concentrated.
Indonesia tied with India for the highest price-to-book ratio at 3.4 times.
Moreover, the country's top five banking stocks make up 12.1 percent of the entire sector, second only to Malaysia, Thomson Reuters Starmine data showed.
Bank Central Asia , the country's largest lender by value, is trading at a 66 percent premium to domestic peers on a price-to-book basis. The bank has been underperforming the broader market after Bank Indonesia had reluctantly to raise policy rates on Friday.
Foreign institutional investors often stick with the most liquid stocks, especially in relatively small markets such as Indonesia. So profit-taking or a rotation out of financials by these players will continue to have a pronounced impact on the entire sector.
Indonesian shares, especially in the financial sector, remain rich when looking at forward price-to-earnings, price-to-book and earnings revisions compared with other regional markets.
At record highs reached in early January, the Jakarta Composite had nearly doubled since the end of 2008 as investors flocked to the country's strong consumer-driven and resource-rich economy.
Since peaking on Jan. 6, Indonesian stocks have lost about 8 percent and have been among the hardest hit, along with India and the Philipines, as mounting price pressures and doubts about the inflation-fighting credibility of some central banks have spurred a shift into major equity markets.
Investors will probably need valuations to drop back near long-term averages and some reassurances on the inflation front before shifting more funds back to Asia's market darling of the past two years.
Indonesia's central bank surprised markets on Friday with its first interest rate rise since 2008 and most economists see three more modest increases by year-end as it tries to contain price pressures.
FINANCIAL SECTOR STILL VULNERABLE
For a chart comparing Asian country financial sector price-to-book ratios relative to their weighting in overall country indexes: link.reuters.com/xav77r
Indonesia's financials, the second-largest sector by market cap on Jakarta's main board, have been a popular play on the country's domestic consumption. Foreigners tend to like the depth of the sector, as well as its direct exposure to Bank Indonesia's policies last year to spur lending.
That trade looks squeezed dry. Looking at the five biggest financial sector stocks by market cap in emerging Asian countries, Indonesia sticks out as being expensive and highly concentrated.
Indonesia tied with India for the highest price-to-book ratio at 3.4 times.
Moreover, the country's top five banking stocks make up 12.1 percent of the entire sector, second only to Malaysia, Thomson Reuters Starmine data showed.
Bank Central Asia , the country's largest lender by value, is trading at a 66 percent premium to domestic peers on a price-to-book basis. The bank has been underperforming the broader market after Bank Indonesia had reluctantly to raise policy rates on Friday.
Foreign institutional investors often stick with the most liquid stocks, especially in relatively small markets such as Indonesia. So profit-taking or a rotation out of financials by these players will continue to have a pronounced impact on the entire sector.
LOSS OF MOMENTUM
For a chart comparing Indonesia's forward earnings revisions with China and India: link.reuters.com/put67r
Even before rising food and fuel prices made investors focus squarely on inflation risks, Indonesia had the second-highest consumer inflation rate in Asia Pacific ex-Japan behind India.
Throughout the bull run that began around April 2009, price pressures were not an issue because Indonesia's expected earnings growth was relatively high.
Indonesia had a clear advantage of earnings momentum a year ago over the two other emerging Asian markets where inflation concerns are the most acute, India and China. That momentum in forecast earnings fizzled near the end of 2010.
The tables have turned, and revisions to forecast earnings for Indonesia are now running behind China and India, according to data from Thomson Reuters I/B/E/S.
EXPENSIVE RELATIVE TO SOUTHEAST ASIA
For charts comparing Southeast Asia equity valuations: link.reuters.com/zav77r
Last year, buying into Indonesia's equity market was a no brainer for an investor who wanted exposure to Southeast Asia, a part of the region that led stock market returns. Indonesia had momentum and cache as the next up and coming emerging market, heralded as the next BRIC and poised to gain investment grade status.
At this point, Indonesia may still be too rich relative to other regional markets, even though earnings forecasts have been coming down.
The MSCI Indonesia index on a dollar basis is trading at a 12-month forward price-to-earnings multiple that is 35 percent higher than its long-term average, Thomson Reuters I/B/E/S data showed -- far higher than Thailand (15 percent), the Philippines (8 percent) and Malaysia (7 percent).
For foreign investors to get excited about the next BRIC again, earnings momentum may have to accelerate or share prices may need to come down further.
Source: Reuters
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