The most common argument in a bubble market is ‘this time it’s different’. For me, what is different is globally low interest rate environment, and currency wars. In the domestic arena, Bank Indonesia’s policy of choice to maintain interest rates and control liquidity by raising reserve requirements also reflect the unwillingness to let the currency raise. BUMI, our call last month, gav! e a stron g return (+28.0%MoM) vs IDX return MoM of 13.6%. Our index target of 3,375, has been surpassed (3,501 by Sept 30), and we turned Neutral. As for sector picks, we are turning to commodities on improved return/risk reward after ytd strong run in domestic demand sectors such as JAKMIND (Astra Intl), JAKTRAD (United Tractor, Mitra Adiperkasa). Our picks in the commodities are: BUMI (TP:Rp3,665), Adaro (TP:Rp2,500). We also like property such as KIJA (TP: Rp265), BSDE (TP! :Rp1,210), and SMRA (TP:Rp1,400).
Moderating inflation. Indonesia inflation slowed down to 0.44% MoM or 5.80% YoY in Sept 10 from 0.76% MoM (6.44% YoY) in the previous month. The figure is lower than consensus estimate of 0.56%. Core inflation also receded to 4.0% YoY in Sept 10 from 4.2% a month earlier. Trade balance was back in the black in August with US$1.5bn surplus as imports declined to US$12.2bn (+25.9% YoY) with exports reaching a new record high of US$13.7bn (+30.0% YoY). Gradual improvement in external demand and pickup in commodity pr! ices were the main drivers for the rise in export value.
Rising reserve requirements. Bank Indonesia (BI) in Sept 9, 2010, told commercial banks to raise their minimum primary reserve requirements from 5% to 8% starting November 1, 2010. BI will also apply a countercyclical measure in reserve requirements by punishing banks with LDR of above 100% and CAR below 14%. BI also imposed additional reserve requirements for banks with LDR of below 78%. LDR-linked additional reserve requirements will take into effect by March 1, 2011.
Domestic demand counters still the favorites in September. Gudang Garam (+31.0% MoM), Astra International (+19.8% MoM), and banks such as Bank Mandiri (+22.0% MoM), BCA (+15.5%MoM) were the drivers behind the IDX leap this month. However, commodity plays like BUMI (+28.0% MoM) and Timah (+32.6%MoM) started to reappear in the top 40 market cap performance list. IDX is now trading at 14.4x 2011 rolling PER, or 0.9x std deviation from 14 years average PE-band of 10.9x. T! he last t ime the IDX had sustainable performance at this level was in the pre 1998 Asian crises. Although one can not solely depend on historical performance for future projection, the current IDX height brings a sense of dizziness.
Depreciating currencies. With countries depreciating their currencies, a logical consequence is rising commodity prices. We expect this to continue as price in gold unit is still low (Exhibit 2). We are also looking with interest in the property sector on the same logical consequence as anecdotal evidences indicated a jump in property prices in the last 12 months.
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