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With a continued decline in interest rates, the Indonesian
stock market could become the best investment alternative for investors
willing to take a risk to gain higher returns, financial analysts say.
ABN-AMRO Asset Management president director Rima Suhaimi said
Wednesday in Jakarta that with lower interest rates and easing
inflation, the country's stock market would likely outperform the stock
exchanges of other Asian countries, at least until the end of next year.
She forecast that the Jakarta Composite Index, the main price barometer
for the Jakarta Stock Exchange, would continue to maintain its good
performance in line with the stability of Indonesia's political and
macroeconomic environment, and improving foreign investor confidence.
"Less turbulence in political affairs, a relatively stable rupiah, and
easing inflation and interest rates should provide an additional boost
to stock valuations," Rima said Wednesday at the relaunching of the
ABN-AMRO Indonesia Equity Value Fund, which was previously known as
ABN-AMRO Indonesia Dana Saham.
The central bank Bank Indonesia cut its benchmark interest rate by half
a percentage point to 10.75 percent in Oct. 5 on an improvement of the
country's economic fundamentals.
The rate cut is the third in a row of its size, following 25-bps trims
in May and July. The central bank had by December last year raised its
key BI rate to 12.75 percent following October's fuel price hike which
pushed up inflation to 17 percent.
On-year inflation has since slowed to 14.55 percent by September, the
Central Statistics Agency (BPS) reported earlier last week.
Inflation, meanwhile, is expected to come around at 6.7 percent this
year, Deputy Governor Hartadi A. Sarwono said,
BI said room for further rate cuts will remain open if inflationary
pressures and other monetary risks continue to be under control.
With easing inflation, analysts estimate that the BI rate will come
down further to between 8.5 percent and 9 percent early next year.
"For 2006 onwards, the Indonesian stock market is expected to generate
higher returns," Rima said, adding that the market's return on average
equity (ROAE), which stood at 24 percent at present, could increase to
25.6 percent in 2007 and 28.2 percent in 2008," she said.
Based on Earnings Per Share (EPS) and Price to Earning Ratios (PER),
the Indonesian equity market was still much more promising than other
stock markets in the Asian region.
Indonesia's EPS figure of 24.8 percent was better than Australia's 20.2
percent, India's 19.3 percent, Singapore's 17.2 percent, Japan's 11.8
percent and China's 10 percent.
Rima also noted the improvement in the credibility of the local stock
market from the perspective of foreign investors' point of view after
the upgrading of Indonesia's long-term foreign currency rating from B+
to BB-, which provided a good indication that the country's stock
market would remain in good shape.
She said that mutual funds, particularly those invested in stocks, had
the potential to enjoy higher returns in line with the improvement in
the stock market performance.
The JSX's Composite Index closed at a new high of 1,554.92 on Tuesday,
exceeding the previous record close of 1,553.06 on May 11.
ABN-AMRO head of portfolio management Eli Djurfanto said he was upbeat
the index would pass the 1,600 barrier before the end of this year, and
rise further to above that level in the first months of 2007.
He suggested, therefore, that Indonesian investors take advantage of
the bullish sentiment in the stock market.
"We would suggest that investors select stocks that are sensitive to
the downward trend in interest rates, such as banking and blue-chip
stocks. In the future, in line with the government's commitment to
infrastructural development, we would also suggest that investors put
their money in the stocks of heavy construction companies, basic
industry companies and building companies," Lie said.
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