Indonesian bourse unlikely to rebound due to oil cost, inflation

Tag : Peak Oil

JAKARTA (Thomson Financial) - As one of Asia's best performingmarkets in 2007, the Indonesian bourse has so far this year beenstruggling to revisit its record peak, but analysts believe it isnot going to happen within the next three to six months.
Soaring oil prices, which forced the government to allow local fuelproducts prices to rise in May to reduce the state's fuel subsidyburden, will continue to be the biggest drag on the market'sperformance in the near term, they said.
The only way they see the market staging a recovery is on the backof a retreat in crude oil to about $120 barrel or when a newgovernment takes over after next year's election to set a clearerpolicy on fuel price hikes.
Following the fuel price increase in May, analysts began to fearthe possibility of consumer inflation sizzling above 10 percent byyear-end, which is likely to prompt the central bank, BankIndonesia (BI), to hike its key interest rate to about 9 percent.
'I think the third quarter is going to be quite tough because thecentral bank may raise interest rates further,' said David Chang,an analyst at UOB Kay Hian.
Given that oil prices are now approaching $150 a barrel, 'the stockmarket outlook is not so good,'he said.
Additionally, the likelihood that political tensions in the countrywill heat up ahead of general elections next year could furtherdampen investor appetite for cheap stocks during the remainingquarters of this year.
Commodities led by coal companies are the only stocks perceived aslikely to support the market against any major index correction,the same way they helped buoy the market in the first half.
The benchmark Jakarta composite index finished the second quarterat 2,349.11 points, down 14.4 percent this year, or 17 percent offits record level of 2,830.26, hit on January 9.
After rallying by 55 percent in 2006, the Indonesian marketachieved another solid gain of 52 percent in 2007 to become thesecond-best performer in Asia after Shanghai, which surged 96percent.

Margin squeeze

But spiralling fuel prices for both industry and transport use thisyear could squeeze companies' earnings by boosting the cost ofmanufacturing, transportation and other related services, whiledemand could weaken as consumer income drops, said said ElviraTjandrawinata, analyst at state brokerage Danareksa.
'I noticed that at our (brokerage), earnings forecasts are beingrevised down and then lowered again after some time. We started theyear by expecting a 24 percent (average) earnings growth (forlisted companies). In March the expectation was down to 21 percent.Now it is at 19 percent,' she said.
'My suspicion is that in the second quarter, companies other thancommodities-related, must have seen margin contractions,' she said.
'So, can the market bounce back in the next three to six months? Iam not that optimistic. I just don't think so,' she said.
'The market may rally again if the oil price drops and stabilisebelow $120. That's the only trigger for a possible rebound,' saidNicholas Untung, an analyst at CLSA Indonesia.
The bourse may also find support if the government goes ahead witha proposed move to limit the maximum allowable consumption ofsubsidised fuels by motorists in order to rein in fuel subsidyspending at not more than 135 trillion rupiah ($14.7 billion) or 14percent of the government's total budget this year.
In terms of monetary policy, the BI is expected to raise itsbenchmark rate, known as the BI rate, by 25 basis points to 8.75percent as soon as its next meeting on Thursday, according to eighteconomists polled by Thomson Financial. It would be the third BIrate hike in three consecutive months.
The bearish outlook for the stock market in the current interestrate environment 'is something normal,' Untung said.
BI began cutting its interest rate from a peak of 12.75 percent inMay 2006. The last cut was by 25 basis points to 8.0 percent lastDecember.

Coal shines

Coal companies are expected to continue to outperform the broadmarket in the third quarter as the sector draws its strength fromhigh oil prices. Coal is used widely as an alternative fuel forpower generation, replacing oil fuel.
Coal producer PT Indo Tambangraya Megah Tbk, PT Bumi Resources Tbkand PT Tambang Batubara Bukit Asam Tbk were the best performingstocks among the top 20 blue chips during the first half.
Banks and telecom stocks were among the worst performers.
'Foreign investors have a negative view of telecom stocks becauseof regulatory risks,' UOB's Chang said.
Chang was referring to the legal battle fought by Singaporeinvestment arm Temasek Holdings against an anti-competitive chargeby the Business Competition Supervisory Commission (KPPU) forcontrolling the two biggest cellular operators in Indonesia.
While appealing to the Supreme Court to cancel the charge, Temasekrecently sold its stake in one of the cellular companies, PTIndosat Tbk, to Qatar Telecom.
The KPPU also recently declared six telephone companies including,PT Telekomunikasi Indonesia Tbk (Telkom), guilty of price-fixingfor their short message service (SMS).
aloysius.bhui@thomsonreuters.com
-- By Aloysius Bhui --
ab/nt/ab/nt

COPYRIGHT

Copyright Thomson Financial News Limited 2008. All rights reserved.
The copying, republication or redistribution of Thomson FinancialNews Content, including by framing or similar means, is expresslyprohibited without the prior written consent of Thomson FinancialNews.






Neither the Subscriber nor Thomson Financial News warrants thecompleteness or accuracy of the Service or the suitability of theService as a trading aid and neither accepts any liability forlosses howsoever incurred. The content on this site, includingnews, quotes, data and other information, is provided by ThomsonFinancial News and its third party content providers for yourpersonal information only, and neither Thomson Financial News norits third party content providers shall be liable for any errors,inaccuracies or delays in content, or for any actions taken inreliance thereon.