Biggest Indonesian Fund to Boost Equities, Bonds: Southeast Asia

Indonesia’s biggest pension fund plans to boost equity and bond holdings in 2014 as it expects domestic consumption and a possible reduction in interest rates to raise company earnings in a presidential-election year.

Badan Penyelenggara Jaminan Sosial Ketenagakerjaan, formerly known as PT Jamsostek, will increase the proportion of equities to 25 percent of total assets by the end of 2014 from 22 percent last year, President Director Elvyn Masassya said in an interview in Jakarta on Jan. 3. The state-owned fund, which oversees about $12.3 billion, will raise bond holdings to 48 percent of the total this year, from 45 percent, he said.

Increased stock purchases by the fund last year helped stabilize the slumping equity market. The Jakarta Composite Index pared losses to finish 1 percent lower in 2013, its first annual drop since 2008, as foreign investors pulled out a net $1.8 billion on expectations of reduced U.S. stimulus and concerns with Indonesia’s current-account deficit and the falling rupiah.

“In the short term, time deposits are providing a more attractive return even compared with equities,” said Masassya, 46, who expects foreign outflows to continue in the first quarter as the Fed cuts its bond buying program. “However, in the longer run, we have to come back to equities and bonds.”

The Jakarta index may climb as much as 17 percent to 5,000 this year, he said. The gauge, which fell 1.3 percent to 4,202.809 today, traded at 12.5 times 12-month projected earnings, down from a 2013 peak of 16.1 times on May 20. Indonesian 10-year bond yields rose 14 basis points to 9.14 percent today, the highest level in three years, according to data compiled by Bloomberg.

Election Boost

The fund expects total assets to increase to 181 trillion rupiah ($14.9 billion) this year, from 149.8 trillion rupiah at the end of 2013, as it gains new members from the introduction of a nationwide insurance program. The fund changed its name on Jan. 1 when it became the administrator for the state’s social security money in the world’s fourth-most populous nation.

Masassya said he expects consumer and retail companies to benefit from spending by political parties ahead of national elections in April and July. Indonesian consumer stocks were the best performers in the past year, with the Jakarta consumer goods index advancing 14 percent in 2013.

The two biggest gainers in the consumer index were PT Ultrajaya Milk Industry & Trading Co., which more than tripled, and PT Tri Banyan Tirta Tbk, a bottled water company that climbed 89 percent.

Domestic Demand

Domestic demand will help Indonesia’s economy grow by 5.5 percent to 5.7 percent this year, Masassya said. His projection is below Bank Indonesia’s forecast of 5.8 percent to 6.2 percent growth in 2014.

“Companies with the bulk of their revenue coming from the domestic market will be the main beneficiaries this year,” said Masassya, declining to comment on specific companies. “This includes consumer goods, retail companies and probably after the election, property stocks will rise.”

Indonesia’s President Susilo Bambang Yudhoyono will end his second term this year and cannot be re-elected, leading to a wide-open field of candidates to replace him and investor uncertainty that has been weighing on markets.

Masassya’s remarks reinforce a view that the equities market may remain under pressure at the beginning of the year, said Andy Ferdinand, head of research at PT Batavia Prosperindo Sekuritas in Jakarta.

‘Remain Cautious’

“It shows that he is still not comfortable with the current market condition,” Ferdinand said by phone today, adding Batavia recommended investors stick to defensive stocks such as PT Telekomunikasi Indonesia, PT Jasa Marga and PT Indofood CBP Sukses Makmur. “Investors should remain cautious in the first two quarters because of the uncertainties due to the general election. But we might have a rebound in the second half.”

The rupiah, which lost 21 percent in 2013, will probably resume weakening later this month ahead of the presidential elections in July, Dariusz Kowalczyk, Hong Kong-based strategist at Credit Agricole CIB, said on Jan. 2.

Bank Indonesia has lifted its benchmark interest rate by 1.75 percentage points since early June, its most aggressive tightening cycle in eight years, in an effort to slow the economy and narrow the current-account gap. The higher rates have so far failed to shore up a currency that was Asia’s worst performer in 2013.

The central bank “hopes” the current-account gap may narrow to less than 3 percent of gross domestic product this year, from 3.8 percent in the three months from July through September, Governor Agus Martowardojo said on Jan. 3.

Current Account

Indonesia’s elections and current-account deficit are deterring Western Asset Management Co. and PineBridge Investments LLC from snapping up 2013’s worst-performing developing nation bonds. The debt slid more than 13 percent last year, more than three times the loss on Asia’s local-currency sovereign notes, according to Bloomberg indexes.

Masassya said he expects 10-year bond yields to stay around 8.5 percent to 9 percent in the first quarter of the year. He expects Bank Indonesia to maintain its rate at 7.5 percent throughout the first half and then potentially cut in the second half of the year. The central bank is expected to keep rates steady all year, according to the median estimate of 12 economists surveyed by Bloomberg.

“After the market reaches a new equilibrium in the second half, I’m sure the interest rate will slowly come down, and the election result will lure investors to return to Indonesia,” Masassya said.

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