Last week, Indonesia's main stock index (IHSG) moved remarkably well. The index managed to set a new record high at 5145.68 points on Friday (17/05/13) as it was pushed up by its strongest pillar of support, the consumer sector. Indonesia's consumer sector rose as much as 8.23 percent last week, while the largest obstacle to growth was the country's mining sector, which experienced a correction of 3.31 percent. What are the underlying reasons of last week's gain towards yet another record high? And is it sustainable?
First of all, it is important to note that - although the index continues to rise - its PE ratio continues to decline. This is largely due to good financial results of the country's property companies. Currently, the IHSG has a PE ratio of 18.5x, which is lower than last week's 19.2x. The weighted average PE of the IHSG is still high, however, at 21x. Usually, the index average is between 15 and 17x, but we can only speak of the IHSG as being overpriced if it surpasses the level of 25x.
Secondly, the market appreciated the central bank's decision to maintain the benchmark interest rate (BI rate) at 5.75 percent. This indicates that the economy is considered as being stable. The central bank did also not change its inflation target. Its target is still 4.5 percent for 2013 (with an error margin of one percent) as recent headline inflation was caused by volatile food prices, which will stabilize again.
Thirdly, Indonesia's index is supported by economic recovery in the United States and Japan. Japan's first-quarter GDP grew 3.5 percent, the quickest pace in a year. In the USA, the Dow Jones Index also reached a new record high level supported by widely-carried optimism that US consumers will give a further boost to the economy.
Where will the IHSG go this week? If we think about what the positive data have been from within Indonesia, then it is only confined to the maintained BI rate as well as good performances of a number of Indonesian (blue chip) companies. Apart from that, foreign investors are still mostly selling their Indonesian stock portfolios. Standard & Poor's downgrade of its outlook on Indonesia's credit rating from positive to stable made many foreigners cautious and eager to sell. Since the start of May, foreigners recorded a net sell of IDR 2.9 trillion. This outflow was offset, however, by the inflow of Indonesian institutional funds, thus providing room for growth.
The IHSG is most likely to remain volatile. Foreigners are expected to continue selling parts of their portfolios, but the lowering PE ratio will stimulate domestic institutions to purchase assets. I expect that the index, which has risen considerably lately, is susceptible to profit taking but is most likely to remain within the 5,000 and 5,200 points range.
David Sutyanto is a research analyst at Jakarta-based First Asia Capital