In 2013, the IHSG recorded a disappointing performance. The index reached record high levels in the first five months of the year, but after Ben Bernanke hinted at an end to the the quantitative easing program in late May 2013, foreign capital outflows occurred causing a plunging stock index as well as a sharply depreciating rupiah exchange rate.

Which factors will support the performance of the IHSG in 2014?

Indonesia's legislative and presidential elections, scheduled for mid 2014, are expected to trigger increased domestic consumption and other economic activity. These elections may add 0.2 to 0.3 percentage points to Indonesia's total economic growth. Traditionally, Indonesia's stock index always jumps after general elections as market participants tend to be more optimistic about (relative) increased political and economic certainty.

The current account deficit of Indonesia, which has been a great concern to many investors, is expected to return to a sustainable level in 2014. In the second quarter of 2013, the deficit stood at USD $9.8 billion or 4.4 percent of GDP, an unsustainable level. Due to the government's efforts to curb oil imports (for example by reducing fuel demand by raising prices of subsidized fuels in late June 2013), the weakening rupiah and the government's fiscal policy packages, the current account deficit is expected to ease to below 3 percent of GDP next year. In the third quarter of 2013, it had already eased to 3.8 percent of GDP (USD $8.4 billion). A sustainable current account deficit will enhance investors' confidence in the Indonesian economy.

Inflation, which accelerated to almost 9 percent (year-on-year) in the second semester of 2013, is largely under control. The country's consumer price index jumped sharply after the government raised the prices of subsidized fuels in June 2013 in combination with weak government policies regarding food import quotas. The central bank targets inflation of 4.5 percent (yoy) in 2014. For Indonesia this constitutes a normal rate. GDP growth in 2014 is expected to be in the range of 5.5 to 6.0 percent.

In order to safeguard financial stability (particularly curbing inflation and the trade deficit), Indonesia's central bank raised its benchmark interest rate (BI rate) significantly between June and November 2013. The BI rate rose from 5.75 percent to 7.50 percent. To mitigate the impact of the winding down of QE3, the BI rate may be raised to 8.00 percent in the first quarter of 2014. Although the higher BI rate brings much-needed financial stability to Southeast Asia's largest economy, the higher interest rate environment also curtails economic expansion. In the second semester of 2014, however, analysts expect the central bank to lower its BI rate again, thus providing room for increased economic growth. Indonesia's listed companies are expected to post average net profit growth of 16 to 18 percent in 2014, more than this year's assumption of 14 to 16 percent.

Although a winding down of the Fed's quantitative easing program will most likely result in capital outflows from Indonesia's capital markets in the first months of 2014, indirectly the winding down is expected to contribute to improved financial results of Indonesian companies in 2014. A stop to QE3 implies that the US economy has improved and thus will result in more US demand worldwide. For Indonesia's exports this is a positive development.

In line with a more stable domestic and global economy in 2014, the Indonesia Stock Exchange (IDX) targets more initial public offerings (IPOs) next year compared to this year. In 2013, 29 Indonesian companies have conducted their IPOs on the IDX. Today, Sido Muncul Herbal will follow.

Most Promising Stocks in 2014:

Sector Company
 Potential Growth
Banking Bank Mandiri             27%
Banking Bank Tabungan Negara             28%
Consumption Kalbe Farma             19%
Cement Indocement Tunggal P             23%
Property Summarecon Agung             40%
Construction Wijaya Karya             33%
Infrastructure Jasa Marga             31%
Miscellaneous Astra International             13%
Trade Surya Citra Media             13%
Mining Tambang Batubara Bukit A              6%
Plantation Astra Agro Lestari              7%

Source: Investor Daily