Stocks Rally to Record in Indonesia as Banks Surge on Low Rates

(Bloomberg) -- Indonesia’s main stocks index topped 6,000 for the first time as local investors continued to chase returns amid declining bond yields.

The Jakarta Composite Index rose 1.2 percent to end at a record 6,025.434 on Wednesday, the second-best performance among major Asian markets. PT Hanjaya Mandala Sampoerna, a unit of Philip Morris International Inc., rallied 2.8 percent, providing the biggest boost for the gauge. PT United Tractors jumped 9.1 percent and PT Bank Mandiri added 2.6 percent.

Indonesian equities outperformed emerging-market counterparts from the global financial crisis through early 2016, helped by inflows from global asset managers and the growth of middle-class consumers in the world’s fourth-most populous nation. While they’re no longer leading the pack -- the JCI has risen 14 percent this year versus the 30 percent advance in the MSCI Emerging Markets Index -- demand from domestic institutions has cushioned stocks from record withdrawals by foreigners.

“Pension funds and insurance were forced to seek higher returns from equities” amid falling interest rates and lower bond yields, said Jemmy Paul, investment director at PT Sucorinvest Asset Management. “The rally in Indonesian stocks this year was largely supported by them.”

Foreigners, on the other hand, have pulled $1.34 billion from local shares in 2017, including the largest quarterly outflow on record in the three months through September.

Bank Indonesia lowered its benchmark interest rate eight times since the beginning of 2016 for a total of 200 basis points, including two cuts in a row this year. The yield on benchmark 10-year government bonds has dropped 115 basis points this year to 6.82 percent.

Banks Rally

The Jakarta Finance Index jumped 27 percent since Jan. 1, the most among nine industry groups in the key gauge, amid expectations that lower bad debt will improve lenders’ profitability this year. Lower borrowing costs have benefited rate-sensitive stocks including banks, as PT Bank Central Asia became the biggest company on the Jakarta Composite Index by market value.

“Investors are still waiting to see what earnings will be in the third quarter,” Bharat Joshi, head of Indonesian investments at Aberdeen Asset Management Plc, said in an interview in Singapore. “It’s unlikely to disappoint because the second half of last year was off a very low base,” he said, adding that consumption is expected to return.

Construction companies, which trailed the broader market this year due to concerns over infrastructure funding, rallied on Wednesday after the parliament approved budget proposals for 2018, which target record government spending to accelerate economic growth. State-run PT Adhi Karya and PT Waskita Karya paced the gainers, climbing 5.6 percent and 4.2 percent respectively, while toll road operator PT Jasa Marga jumped 5 percent.

“Construction stocks provided support for the index after they got badly beaten in the first half,” said Jeffrosenberg Tan, a strategist at PT Sinarmas Sekuritas. “The rally has been driven by gains in banking stocks throughout 2017. We are also optimistic on consumer staples as we predict consumer spending should come back next year.”

The Jakarta Composite is valued at 15.9 times its 12-month projected earnings, higher than its five-year mean of 14.6 times.

--With assistance from Livia Yap

To contact the reporter on this story: Harry Suhartono in Jakarta at hsuhartono@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Thomas Kutty Abraham, Ravil Shirodkar

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