By Dow Jones
Indonesian shares turned lower Tuesday, bucking a regional
rally, a contrast that highlights what analysts say are the
country's clear risks despite potential rewards.
The first such risk is inflation: On Monday, data showed that
Indonesia's consumer price index rose to its highest level this
year in July. The CPI was up 6.22% from the year-earlier month,
accelerating from June's 5.05% year-on-year rise, and up 1.57% from
June.
The July reading was higher than the central Bank Indonesia's
target range of 4%-6%. Bank Indonesia has maintained its key
interest rate at record low of 6.5% since August 2009, and says it
will hold steady this year if inflation stays within its target. On
Wednesday, the BI will hold a regular monetary policy meeting, and
also give its assessment of the current policy stance.
Currency appreciation is another risk. Indonesia's central bank
reportedly said Tuesday that it's studying plans to redenominate
the rupiah, which is currently worth about 9,000 to the U.S.
dollar. A central bank spokesman said it would have no inflationary
impact and could take five to 10 years to implement, according to
Reuters.
A few large companies
Indonesian shares jumped about 20% in July, making the Jakarta
Composite Index the best performing major Asian index. But a closer
look at the recent performance shows gains concentrated in just a
few large companies, analysts say.
In the second quarter, the JCI advanced by 136 points, but 100%
of those gains were attributable to just five stocks: Unilever (UN)
unit PT Unilever Indonesia (UNVR.JK), Gudang Garam , Astra
International, Bank Mandiri (PPERY) -- the country's biggest bank
by assets -- and second-biggest Bank Rakyat Indonesia .
"If you exclude these five stocks, in aggregate investors in
Indonesian equities broke even" in the quarter, J.P. Morgan
analysts Aditya Srinath, Sriyan Pietersz and Adrian Mowat said in a
recent report.
In contrast, they said, those top five stocks accounted for only
39% of the first quarter's index advance.
"Clearly, while the JCI's moves are attracting attention, the
appreciation in Indonesian equities is becoming narrower," they
said, adding, "We do not see this as a good sign."
Nonetheless, they said, over the last three months they've
observed an increase in client interest from those with broader
international mandates.
"While the market may be held back in such cases by its
benchmark weight, there is no doubt that Indonesia has now shown up
upon the radar of a larger group of investors -- almost all of whom
do not have any existing positioning in the country," they
said.
On Tuesday, the JCI skidded 1.3%.
Unilever Indonesia lost 1.5%, Gudang Garam fell 1.0%, Astra was
down 4.3%, Bank Mandiri lost 3.4% and Bank Rakyat Indonesia dropped
2.1%.
In broader regional trading Friday, Australia's S&P/ASX 200
was up 0.5%, South Korea's Kospi was 0.3% higher, Hong Kong's Hang
Seng Index gained 0.7%, and Japan's Nikkei 225 Average added 0.8%,
while the Topix index gained 07%. But China's Shanghai Composite
dropped 0.6%.
Rupiah appreciation
Some analysts also said that while investors were hopeful about
President Susilo Bambang Yudhoyono's market-friendly reforms,
actual progress has been slow.
"Sooner or later, we think that investors will need to bear in
mind that a lack of reform could restrict the capacity for
Indonesian growth to transform from a cyclical surge to a more
permanent structural shift higher," the J.P Morgan analysts
said.
But they cited rupiah appreciation as the biggest medium-term
upside risk. Despite efforts to stem the buoyant currency --
including reports of direct currency-market intervention -- funds
flowing into the country have put upward pressure on the
rupiah.
The rupiah was Asia's best-performing currency in 2009, rising
17% against the U.S. dollar. While a stronger currency can hurt
exporters, it can also help contain inflationary pressure, not to
mention boost stock returns for foreign investors.
If policy makers choose to embrace the inflow of funds rather
than fighting them and stemming the rupiah's rise -- such as
allowing a one-time appreciation of the rupiah to a higher trading
band -- the J.P Morgan analysts would "see such a move as a
game-changer, and would necessitate a review of our outlook for
Indonesian growth and asset prices."