UDPATE 3-Indonesia stocks hit record, further gains seen

Published: 21 Jul 2010 02:47:54 PST

* Jakarta: Asia's best-performing major index

* Consumer stocks, banks lead gains on fund inflows

* Fund manager, analysts see index reaching 3,200 by end-2010

* Country aims for investment grade status within a year (Updates with details, closing prices)

JAKARTA, July 21 - Indonesia's stock index climbed to a record on Wednesday, as investors buy banks and consumer stocks, attracted by the prospect of it joining China and Brazil as an investment grade emerging market. The stock market is Asia's best major performer this year with a 19 percent rally, fuelled by domestic investors and net foreign buying of $1.07 billion, as funds chase one of Asia's brightest medium-term economic growth prospects.

Throw in political stability, an improved fiscal position and efforts to implement market-friendly reforms, and foreign investment in local debt also hit a record this month as bondholders eye further ratings upgrades to investment grade.

"The potential for Indonesia is positive, it's a lower risk proposition than it was a few years ago. The consumer story here is pretty positive," said Stephen Corry, chief investment officer in Asia for Merrill Lynch Wealth Management, in Jakarta.

Banks, which provide a popular play on consumer demand, have been the main driver for the gains, which followed an 87 percent rally last year as the country proved resilient to the financial crisis and is set to post around six percent growth in 2010.

Fitch Ratings upgraded the country's sovereign rating to one notch below investment grade in January, while Moody's Investors Service and Standard & Poor's rate it two notches below a status that would lead to further institutional investment.

Indonesia expects to win investment grade next year, though this may rely on reforms to tackle graft, lift tax collection and cut fuel subsidies, plus billions in investment to overcome poor infrastructure -- Jakarta suffered a blackout on Wednesday.

DOMESTIC DEMAND

Analysts say domestic investors have stepped up buying, adding to inflows into Southeast Asian markets that are looking increasingly attractive compared to expectations for slower growth in China, Europe's debt woes and a sluggish U.S. recovery.

The index hit a high of 3,014.481, up 0.6 percent, to top a previous record hit on May 4. The market capitalisation is still small at about $270 billion, bigger than Thailand but compared to Malaysia's $320 billion, leaving investors chasing few stocks.

"Strong domestic demand is the main engine for economic growth which is pushing up the index," said Teguh Hartanto, deputy head of research at local brokerage PT Bahana Securities, who expects the index to reach 3,200 by year-end.

"Bank valuations are not cheap, but growth and profitability are still high compared to regional peers," Hartanto said. "Consumer lending growth has already touched 25 percent while overall loan growth is 16 percent. It shows consumer demand is very strong."

Increasing affluence in the world's fourth most populous country has led to a surge in sales of cars, phones and cement.

The index's biggest firm by market cap, car seller PT Astra International, rose 44 percent in 2010, while top state lender PT Bank Mandiriclimbed 30 percent. No. 2 lender PT Bank Rakyat Indonesia led gains on Wednesday.

Valuations are now looking expensive, particularly for banks, and the index's PE ratio is at 16.4, versus Turkey's 9.6.

However, a stronger rupiah, up four percent this year, is also adding to the attractiveness of local currency assets.

"Capital inflows to this region are very hot and I think it will continue...the economic growth is in this region," said Winston Sual, who manages $108 million at Indonesia's top performing fund Panin Dana Maxima.

He also predicts the index will reach 3,200 by the end of the year, representing a 26 percent gain from the end of 2009, with the fund's top picks including tyre maker PT Gajah Tunggal, toll road operator Jasa Marga and the country's top noodle maker PT Indofood Sukses Makmur.

Technically, indicators such as the 14-day relative strength index and Bollinger bands show the index is not yet overbought.

While many consumer stocks have outperformed the index, resource firms have not done so well. The country's biggest coal miner by output, Bumi Resources <BUMI.JK>, is down 29 percent this year on concerns over high debt and corporate governance.