2010 market strategy : Moderate is good

Going into 2010, we expect Indonesia’s GDP growth to moderately improve to 5.2 percent from 4.3
percent in 2009 on continued support from domestic consumption and government infrastructure-related projects.

Excesses would be bad for the Indonesian market, including a robust global economic recovery, which would result in underperformance for the Jakarta Composite Index. This is because Indonesia’s GDP composition remains largely dependent on domestic consumption.

Net exports account for merely 10 percent of GDP, while private plus government consumption accounts for close to 65 percent. Thus a V-shaped global economic recovery would pave the way for outperformance in export-oriented countries such as Singapore and Hong Kong.

Spikes in commodity prices would also have an adverse impact on Indonesia, given the government’s 2010 fuel subsidy bill of Rp 68.7 trillion based on the oil price assumption of US$65 per barrel.

Significantly higher oil prices in 2010 would likely create inflationary pressures, increase the country’s subsidy bill and inflating the budget deficit.

If we assume the oil price will average $80 per barrel in 2010, the government’s subsidy bill would increase to Rp 107.7 trillion or $11.4 billion. This means a $15 price hike in the oil price would be equivalent to Rp 39 trillion or $4.14 billion in an additional subsidy bill for the government.

If the global oil price were to rise beyond $85, we believe the government would be forced to increase the price of subsidized fuel, resulting in eroded consumer purchasing power and higher than expected inflation.

Assuming moderately higher oil prices (below US$85 a barrel), we expect the country’s 2010 inflation rate to normalize to 5.6 percent, up from just 2.8 percent in 2009. Note that this assumes the government holds off on its planned 25 percent average electricity rate hike.

Therefore, moderately higher commodity prices including oil would translate to domestic interest rates staying low for longer. Currently, we are looking at a relatively benign 25-basis-point hike starting in the second half of 2010 to bring the BI benchmark rate 50 basis point higher to 7 percent.

Having said that, we believe cyclical/interest rate-sensitive stocks will continue to outperform defensives in H1, but the likely magnitude of their outperformance will be much less, as the bulk of the acceleration in macro momentum has occurred. This means that for outperformance, investors must be extremely stock selective, owning a combination of cyclicals and defensives.

Our 2010 top five picks are as follows:

Telkom Indonesia, for its defensive and laggard status.

Bumi Resources, benefiting from higher coal prices as only 25 percent of its contracts have been priced.

BNI, for its exposure to government infrastructure-related project financing, undemanding valuation and laggard status.

Timah, benefiting from tin price recovery in 2010.

AKR Corporindo, a combination of defensive sorbitol manufacturing with the kicker coming in from its fast-growing petroleum distribution business.

Happy trading!


The writer is senior vice president and head of research at Bahana Securities