Analysis: Indonesia's stock market set for another boost from earnings

Wed Mar 12, 2014 11:57pm EDT
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By Vidya Ranganathan and Abhishek Vishnoi

SINGAPORE (Reuters) - Asia's best performing stock market this year, Indonesia, is now seeing a string of upgrades in corporate earnings forecasts that could give the rally further momentum and cement its lead in the region.

Jakarta's stock market .JKSE is basking in the quick turnaround the economy made from last year's currency crisis, helped by a rise in interest rates and an improvement in the country's huge trade deficit. The index has risen 17.5 percent in dollar terms so far in 2014, with the rupiah's rally contributing to those gains.

Analysts are now counting on other factors to drive the market up by a further 10 to 15 percent. Indonesia has presidential elections in April, and the stock market has historically rallied after elections.

Besides, domestic demand is strong and companies catering to the Indonesian middle class are seeing a jump in earnings. Consensus estimates for future business profits are rising.

"Once people could see that Indonesia's macro was improving faster than the other countries that are perceived to be risky, then Indonesia's risk premium vanished pretty quickly. That is what led to the initial sharp rally," said Jahanzeb Naseer, research analyst at Credit Suisse in Jakarta.

"From here on, what will differentiate Indonesia is that it is probably starting an upcycle in earnings. That tends to be a much more sustained period of recovery for markets."

So far, earnings have not been upgraded as fast as stock prices, causing a rapid expansion in Indonesia's price-to-earnings (PE) multiples.

The consensus PE ratio for Indonesia is 26.3 percent above its long-term average, analysts at Nomura estimate, whereas most others in Asia have PEs at or below long term averages.   Continued...

Indonesian traders walk in front of an Indonesia Stock Exchange board in Jakarta, June 12, 2013. REUTERS/Beawiharta