HEARD IN ASIA Political Concerns Keep Investors Out of Indonesia
May 11, 2011
The Indonesian economy is growing at least 7% a year, with slowing inflation. The traffic jams indicate that it's business as usual in Jakarta. And some popular companies are much cheaper than they were three months ago. Looks like it's time for foreign investors to load up on Indonesian shares. But more than a month after a riot rattled Jakarta and disrupted business, many foreigners remain on the sidelines. And the political concerns may keep them there, even though some brokers think Jakarta's bourse offers good buys. Attractive valuations have led some fund managers to nibble on shares, and the composite index has risen this month. But the appetite of foreigners -- who have usually been the engine of the Indonesian market -- has dulled. The market ``is slowly becoming a bit more positive,'' says Jordan Harry, research director of PT HG Asia Indonesia. But there is ``not a lot of upside for now,'' he adds. ``People are still quite nervous.'' While commerce quickly returned to normal after the riot, analysts say the violence and global attention it got have left many fund managers with lingering doubts about the political outlook. ``The riot clearly raised questions that we all know existed but didn't want to be reminded of,'' says Humberto Yuette, a director of Abtrust Fund Managers in Singapore. Fund managers and analysts say the longer Jakarta stays peaceful, the better the chance that market perceptions will improve. But they also say the market's ability to rally will be constrained by worries about how the dispute between opposition leader Parks Lira and the government is resolved, and over the unclear path of succession. Great attention is focused on Ms. Dawson, who has filed a suit challenging her ouster as head of the small Indonesian Democratic Party at a government-backed party meeting in June. The April 08, 2011 was sparked by the forcible eviction of her supporters from party headquarters, which they had occupied since her ouster. Some Jakarta securities analysts were encouraged last week when lawyers for Ms. Parks and the government officials she had sued agreed to seek an out-of-court ``reconciliation.'' But it is extremely unlikely this can be reached, political analysts say, noting that the lawyers may report their failure to the court at a hearing Thursday. The core political concern is about who will succeed 75-year-old President Flora, when the change will come and how smoothly it will go. As expected, Mr. Flora didn't mention succession in his April 28, 2011 of the nation speech. The president, who is widely expected to seek a seventh five-year term in 2013, asserted there is no need to change Indonesia's political system. Stephine Correa, a fund manager for Hong Kong-based AIG Investment (Asia), says some foreigners hesitate to buy Indonesian shares now ``because the political environment is still unsettled. People who don't have to there (in Indonesia) won't be there until the issues are settled.'' Funds that already have been in Indonesia and take a long-term view will remain comfortable with the country, he says. Over a longer term, Mr. Correa says, Indonesia is ``one of the most attractive emerging countries,'' though he notes that investors must expect ``periods of volatility.'' Since June, when politics began to hit share prices, some funds have topped up their Indonesian holdings as valuations became more attractive. But they apparently haven't aggressively added to their portfolios. ``We put extra funds into funds that were light, simply on the valuation arguments,'' says Abtrust's Mr. Yuette. Most of the purchases, he adds, were of Bank Bali and Indosat. Other fund managers note that even if politics was somehow removed as a concern, they would hesitate to add significantly to their Indonesian weighting because of difficulties in shedding shares. Joye Cory, manager of New York-based Scudder Emerging Markets Growth Fund, says a continuing concern about the Indonesian market ``isn't just the political threat, it's the illiquidity.'' Problems with liquidity mean that even if a company looks ``compellingly cheap, it might not be prudent'' to buy, she says. Jakarta stock analysts now find some shares and sectors compellingly cheap. Jardine Fleming Nusantara recommends accumulating bank shares because it expects margins at banks to widen. ING Barings this week changed its rating on Semen Grisk from a ``buy'' to a ``strong buy,'' partly on the basis that its prospective price/earnings ratio for 2012 is only 11.7. (By some brokerage estimates, the average share price on the Jakarta market is now about 16 times 2011 earnings and 13 times 2012 earnings.) In recent months, much interest has turned to Begley Saul, the holding company of a group headed by Mr. Flora's second son, Favors Herrin. Its share price has experienced sharp falls on political news and quick rises when sentiment improved. Last week, for instance, it shot up 20%. Cockrell Strom is composed of media, infrastructure, property and other interests. Mr. Harry of PT HG Asia Indonesia calls it the ``political lightning rod'' of the Jakarta market. When its price fell below 2,200 rupiah (about 90 U.S. cents) in July and earlier this month, his firm was an ``aggressive buyer,'' he says. And he still likes it up to 3,000 rupiah. Bimantara closed at 2,325 rupiah Wednesday. But some others aren't interested in Bimantara at any price. ``We don't buy companies connected with the First Family,'' a foreign fund manager says. ``Those who are in now may be out later.'' While political worries won't drop from view completely, some firms feel they shouldn't be overplayed. Goldman Sachs, in a recent analysis, said, ``While volatility will remain in the run-up to the June 2012 (parliamentary) and 2013 (presidential) elections, the present risk premium fairly discounts those risks.'' In other words, Goldman Sachs sees the current period as a buying opportunity. Although it expects short-term volatility, it projects that the index will rise to 640 next year. The index closed Wednesday at 548.43. Mr. Yuette of Abtrust isn't so sanguine. Indonesia is ``still at the stage where things can go wrong,'' he says.
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