Nick Cashmore has just issued his strategy report. JCI fell 8% in three days, with food inflation as the latest bug bear. The key issue here issupply-side constraints, be it food or energy and this time is no different.Failure to build infrastructure fast enough does not help.
The central bank continues to reside in an alternate reality as they focus oncore inflation while ignoring the price pressures on the economy due to food and energy costs. Despite implementing piecemeal measures such as removing import tariffs, our house view is that interest rates must rise by 100bps this year to contain inflation. The central bank has also hinted atcurrency appreciation, tempering inflation.
However, in many other areas, Indonesia’s position looks extremely envious. Public sector debt to GDP has dropped to 26% (from 28% in 2009), the fiscal deficit last year was only 0.6%, the country should grow by 6.0% GDP growth this year, unemployment is falling and per capita income hasdoubled in five years. Indonesia's problem is a challenge many governments wish they faced.
With recent market correction, we are starting to see values emerging.Excluding the commodity-linked stock Adaro (ADRO IJ), our blue chips in the table below offer 14% earnings growth, 29% ROE for 13x 2011 PER.
Nick Cashmore’s top picks: Astra Int’l (ASII IJ), Jasa Marga (JSMR IJ), Bank Mandiri (BMRI IJ), Adaro (ADRO IJ), and Indocement (INTP IJ).
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