Indonesia Earnings Lure Credit Suisse to Stocks: Southeast Asia

Indonesia’s best start to an earnings season in six years is adding fuel to Asia’s second-biggest stocks rally as forecasters from Credit Suisse Group AG to JPMorgan Chase & Co. predict further gains ahead.

About 72 percent of companies in the Jakarta Composite Index that posted fourth-quarter results so far have surpassed analyst estimates, the highest proportion at this stage of a reporting season since 2007, data compiled by Bloomberg show. The Jakarta gauge rose 9.1 percent in the three months through last week, the region’s second-largest gain after Vietnam’s VN Index. The MSCI Asia Pacific Index dropped 2.9 percent.

The rally, sparked by Indonesia’s accelerating economy and shrinking current-account gap, may extend another 13 percent this year as sales and earnings growth quicken, according to Credit Suisse. Foreign investors have purchased more than $800 million of shares in Southeast Asia’s biggest economy this year, the most among seven Asian markets tracked by Bloomberg.

“I am super-overweight” Indonesia after increasing holdings at the start of February, Alan Richardson, whose Samsung Asean Equity Fund outperformed 97 percent of peers tracked by Bloomberg during the past three years, said by phone from Hong Kong. “The fourth-quarter results are outperforming expectations surprisingly, especially in the banking sector, which is reassuring because it’s critical the financial system remains healthy.”

Mandiri Earnings

The fund had 7.8 percent of its assets invested in Indonesia, and more than one-third of the total in banking stocks at the end of September, according to data compiled by Bloomberg.

The Indonesia stocks gauge declined 0.8 percent to 4,584.21 at the close in Jakarta today after data showed the country’s trade balance swung to $431 million deficit in January. Russia’s occupation of Ukraine’s Crimea region also spurred investors to shun riskier assets.

Fourth-quarter earnings at PT Bank Mandiri, Indonesia’s largest lender by revenue, and PT Bank Rakyat Indonesia, the most profitable, were at least 20 percent higher than the average of analyst estimates compiled by Bloomberg. Net income at PT Matahari Department Store, the nation’s largest retailer by market value, beat forecasts by 5.6 percent.

The 72 percent of companies that topped estimates so far this year compares with an average 47 percent two months into earnings seasons during the past six years, data compiled by Bloomberg show.

Election Spending

Earnings at lenders may rise 15 percent in 2014, while cyclical consumer companies may report a 17 percent gain, as spending during the country’s elections this year boosts revenue, Joshua Tanja, the head of research at PT UBS Securities Indonesia, said in an interview on Feb. 25.

Indonesia will hold parliamentary elections in April and a presidential poll in July to replace President Susilo Bambang Yudhoyono, whose final term ends this year. Political parties typically boost advertising spending while distributing food, consumer staples and t-shirts to supporters before polls.

“There are early signs that corporate performance for Indonesia may have bottomed in the third quarter,” Jahanzeb Naseer, an analyst at Credit Suisse, wrote in a report dated Feb. 17. Naseer advised shifting to industries that rely most on economic growth, such as banks and consumer discretionary companies, from utilities and phone stocks.

Indonesia’s economy expanded 5.72 percent from a year earlier in the three months ended Dec. 31, compared with 5.63 percent the previous quarter. The country’s current-account deficit is expected to narrow to 2.5 percent this year, from about 3.3 percent last year, according to the central bank.

Expensive Valuations

The measure reached 4.4 percent in the second quarter of 2013 and helped spur a selloff in Indonesian assets during the second half as the U.S. Federal Reserve signaled plans to reduce monetary stimulus. The Jakarta gauge dropped 11 percent in the final two quarters of last year.

Indonesian earnings may come under pressure this year as interest-rate increases by the central bank in 2013 weigh on the economy. Gross domestic product may expand as little as 5.5 percent this year, which would be the slowest pace since 2009, Finance Minister Chatib Basri said on Feb. 23.

It’s too early to buy Indonesian shares after valuations increased this year, according to UBS’s Tanja. The Jakarta Composite gauge is valued at 13.9 times projected 12-month earnings, up from 12.4 in mid-December and 35 percent more expensive than the MSCI Emerging Markets Index. The MSCI Asia Pacific Index has a multiple of 12.4.

“Our advice to clients is don’t get too excited about Indonesia,” Tanja said.

Rupiah Rally

The nation’s shrinking current-account gap has eased pressure on its currency and bolstered investor confidence, according to JPMorgan, which raised its recommendation on Indonesian shares to overweight from neutral on Feb. 19.

The rupiah has rebounded 4.8 percent against the dollar this year, the biggest gain among developing-nation currencies tracked by Bloomberg, after tumbling 21 percent last year. Indonesian shares have lured net buying from foreign investors during 17 of the last 18 days, pushing inflows in February to the highest in 12 months.

“We expect the market and the currency to continue to be driven by declining perception of tail-risk,” JPMorgan strategists including Adrian Mowat wrote on Feb. 19.

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