Performance of Indonesian Stocks:

Sector    Growth
Property    +37.6%
Finance    +24.5%
Infrastructure    +21.4%
Trade    +20.9%
Mining    +13.4%
Consumer Goods    +13.3%
Basic Industries    +13.0%
Manufacturing    +11.7%
Miscellaneous Industry     +7.7%
IHSG    +18.7%

performance between 2 January - 29 August 2014

The property sector of Indonesia has expanded rapidly supported by strong domestic demand for property. Amid a decade of solid economic growth, Indonesia’s middle class has been rising strongly. Last year, the Boston Consulting Group published research that indicates the country’s middle income and affluent classes will almost double between 2013 and 2020 from 74 million to 141 million people, implying that more than half of the population will be categorized as belonging to the middle class by 2020. With increasing purchasing power, Indonesians consume more as well as better quality products and want to live in a better environment. As such, the country’s property and consumer industries have experienced great growth in recent years.

Amid domestic demand, the larger cities of Indonesia see lots of residential property development projects. As most of the residential property is bought by end-users, there is still no sign of a bubble in this sector. For example, the capital city of Jakarta will see 46 new property projects, adding nearly 25,000 new apartments (with a combined value of about IDR 23 trillion, almost USD $2 billion), by 2015. However, approximately 70 percent of these new apartments are bought by end-users, not by speculative buyers.

However, the growth pace of property stocks has declined in the past year as Indonesia’s central bank (Bank Indonesia) started to become concerned in 2013 about the possibility of a property bubble as prices rose sharply. Therefore, the institution set new minimum down payment rules for second properties. The loan-to- value (LTV) ratio for the purchase of a second property was reduced to 60 percent and 50 percent for purchases beyond the second property, meaning that buyers need to pay a down payment of 40 percent for a second property and 50 percent for additional homes. Bank Indonesia also raised its benchmark interest rate (BI rate) gradually from 5.75 percent in June 2013 to 7.50 percent in November 2013. Although this move was primarily aimed at combating high inflation (after the government raised prices of subsidized fuels in June 2013) and curbing the country’s current account deficit, it also slowed the nation’s credit growth, including mortgages for the purchase of property.

Infrastructure and Finance Stocks

Stocks categorized in the infrastructure sector index of the IDX also performed well in the January-August 2014 period (rising +21.4 percent). This positive performance is caused by speculation that the new Indonesian president Joko Widodo (popularly known as Jokowi), who will be inaugurated in October 2014, places great emphasize on infrastructure development in an effort to lower logistics costs, making Indonesian businesses more competitive and boost general economic growth to a level of +7 percent (year on year). Currently, the lack of quality and quantity of infrastructure in Indonesia blocks higher economic growth.

It is interesting to note that due to growth in the country’s property and infrastructure sectors, the finance sector has benefited too as property and infrastructure projects need loans from banks. The finance sectoral index on the IDX was the second-best performer after the property index, climbing 24.5 percent in the January-August 2014 period.

Analyst at Investa Saran Mandiri, Kiswoyo Adi Joe, expects that Indonesian property stocks will experience a correction in the last couple of months of 2014 as property prices have reached a peak (part of a ten-year cycle) and will thus be contained in the remainder of the year placing pressure on property stocks traded on the IDX. Finance, infrastructure and consumer goods stocks, on the other hand, are expected to maintain momentum in 2014. Household consumption accounts for about 55 percent of total economic growth in Southeast Asia and therefore consumer stocks will continue to be a good investment amid solid yet slowing general economic growth.

Important matters that need to be carefully watched by investors are the Indonesian government’s fuel subsidy policy and US interest rates. Indonesia’s generous fuel subsidies distort the economy as it is responsible for the wide current account deficit (causing declined investor confidence) and limits more long-term and structural investments in the country’s infrastructure, education and healthcare sectors. If Jokowi will raise prices of subsidized fuels in order to safeguard a healthy fiscal balance, then foreign net buying of Indonesian stocks is expected to increase sharply. However, higher US interest rates in 2015 can lead to sharp capital outflows, particularly if Indonesia still posts a wide current account deficit. Recently, Statistics Indonesia announced that Indonesia’s current account deficit widened to USD $9.1 billion, or, 4.27 percent of the country's GDP in the second quarter of 2014. This widening was much larger than forecasted by analysts and also meant a sharp widening from (a revised) 2.05 percent of GDP deficit recorded in the previous quarter. Since late-2011, Indonesia has had to cope with a structural current account deficit.