Indonesia still a darling for investors ignoring earnings

Bloomberg

Two thirds of Indonesia’s major companies missed earnings estimates in the first quarter, but that’s done little to stop investors from pouring into this enduring emerging-market darling.
Overseas funds pumped the most money into the market in April for any month since mid-2014, even as Indonesia’s capital region saw its business-friendly governor lose a re-election campaign. The Jakarta Composite Index is little more than 1 percent from the record high reached last week, showing little evidence of concern about commodity-price declines or signs of a slowing in Chinese growth.
What’s giving confidence to foreign money managers from Aberdeen Asset Management Plc to Jupiter Asset Management Ltd. is an expansion in capital spending and sustained economic growth rates of around 5 percent that compare favorably with developed markets. Last year’s cuts in interest rates continue to fuel investment demand, investors say.
“The returns from the index this year are impressive but not out of keeping with other markets in the region,” Ben Surtees, a London-based fund manager at Jupiter Asset Management, wrote in an email. He said his fund will use any weakness “to add to positions or initiate new holdings” as signs of improvement emerge in consumption, automotive and retail sales.
The Jakarta Composite gauge opened 0.1 percent lower to 5,665.11. A government report is forecast to show Indonesia’s gross domestic product rose 5.1 percent in the first quarter from a year before, still below President Joko Widodo’s target of 7 percent for the end of his term in 2019.
Strengthening capital spending should help ensure earnings growth of 13 to 15 percent this year, according to estimates from Aberdeen. By comparison, members of the MSCI Asean Index are projected to post 5 percent gains, according to analysts surveyed by Bloomberg for the same period.
EARNINGS MISS
For the most recent quarter, companies including PT Indocement Tunggal Prakarsa and developer PT Ciputra Development were among those that disappointed, amid weakness in construction and the property industry. “The weaker numbers should largely be temporary,” said Bharat Joshi, a Jakarta-based investment director at Aberdeen. “The commodity capex cycle and the recent slash in borrowing rates should slowly trickle down to the wider economy later in the year.”
Net flows into the nation’s equities exceeded $1 billion in April, underscoring international interest in Indonesia, one of the markets hardest hit during the 2013 “taper tantrum” over prospects for reduced US Federal Reserve stimulus. South Korea is another beneficiary of the search for higher returns, with its Kospi index posting a record Thursday.
The Indonesian rally has stretched valuations in Southeast Asia’s largest economy, however. Last month, the Jakarta Composite Index traded at its biggest premium over the MSCI Emerging Markets Index for more than a year. The benchmark is now 15.5 times earnings projected over 12 months, above the 14.4 average for the past five years.

WEAK SALES
The gains have come even after pockets of weakness emerged in the economy, including a 6.8 percent drop in motorcycle sales in the first quarter from a year earlier, domestic cement sales slipped 0.6 percent — excluding state-owned PT Semen Indonesia — and cigarette industry sales dropped 5.5 percent.
“We are still cautious due to high valuation and rising political risk ahead,” said Jeffrosenberg Tan, a director and head of strategy at PT Sinarmas Sekuritas in Jakarta. Tan says he’s uncomfortable with valuations and has recommended his clients lock in gains and only buy if the market retreats to a more reasonable level. “Foreign flows have been supporting the market as domestic funds trimming down,” he said.