Indonesian stocks climbed to a record, benefiting from foreign inflows that were unleashed by the US Federal Reserve’s dovish tone this week.
The Jakarta Composite Index rose for a fifth straight day, adding 0.4 percent to close at a record 5,540.43. Yields on benchmark government bonds fell to lowest level in nearly five months. Foreigners funneled $138 million into the local stock market on Thursday, the biggest one-day inflow since October.
Shares in the Jakarta gauge are trading at about 24 times current year earnings, smack in line with its average valuation in the last three years. Thanks to earnings growth that analysts see averaging more than 20 percent through 2018, the index’s forward price-earnings ratio is 15.9, making it cheaper than the S&P 500 Index on that basis.
Investors got another bullish signal Wednesday, when Fed officials delivered the quarter-point interest-rate hike they had telegraphed, while stopping short of boosting the outlook for further increases.
“The Fed’s statement has helped removed earlier concerns about a possibility of far more aggressive hikes,” spurring equity inflows, said Jemmy Paul, an investment director at PT Sucorinvest Asset Management in Jakarta who runs a fund that’s beaten 96 percent of peers over the past five years. “The rally might continue as we are expecting an EPS growth of 25 percent for 2017. I think the index should be able to reach 6,100 by the end of the year.”
Household consumption is expected to keep rising while loan growth is predicted to improve this year, in line with increased economic activity and looser monetary policy settings, Bank Indonesia said in a statement on Thursday. The central bank cut interest rates six times in 2016.
“Despite some signs of weakness in the first quarter, we remain confident on Indonesia’s economic outlook in the second half and retain our full year index target of 5,900,” Jeffrosenberg Tan, head of strategy at PT Sinarmas Sekuritas, wrote in a text message.
This week’s rally – the biggest this year – wasn’t supported by Indonesia’s economic fundamentals and the stock market may be poised for a correction, said John Teja, a director at PT Ciptadana Securities. A consumer confidence index fell in February due to concern about the economy and high food prices, Danareksa Research Institute said in a March 1 report.
The Jakarta index’s 14-day relative strength index jumped to 76 on Friday, signaling an overbought condition for the market that hasn’t occurred since August.
S&P Rating Upgrade
It’s not just Indonesia’s equities that are garnering attention. A possible sovereign ratings upgrade by Standard & Poor’s will encourage foreign investors to continue buying the nation’s bonds, Goldman Sachs Group Inc. said in a note Friday. S&P currently ranks Indonesian debt at BB+, the highest junk grade.
“Speculation that Indonesia is going to get its ratings upgraded by S&P has been boosting foreign investors’ interest,” Paul said.