Liquidity has started to come back to this market - CLSA

After a good six months of consolidation, liquidity has started to come back to this market. With the index having breached the 3600 resistance, it will be interesting to see if the market will be able to turn that into a support level instead. Certainly helps that we saw recent the rupiah appreciation neutralizing inflation pressure and full year results were generally strong (with the exception of coal miners hit by rising cost and rain) confirming the strong domestic consumption trend - see result comments below.

Our economist noted that Indonesia’s investment to GDP ratio rose to 32.2% in 2010 from 31.3% in 2009 and only 23.6% in 2005. (This was largely construction investment, 74% of total investment in 2010) We expect accelerating real investment growth from 8.5% in 2010 to 14.2% in 2011 and to 16.4% in 2012. Rising investment growth will drive our real GDP forecast from 6.1% in 2010 to 6.3% in 2011 and to 6.5% in 2012. All in all, robust domestic demand growth will insulate the economy against any weakness in the global economy.

If Russell Napier recent big SELL call on U.S. equities turns out to be accurate, Indonesia will be a market within Asia ex Japan to really stand out. The US is expensive on CAPE valuations having risen from 13x to 23x. He has been talking to the banks and QE2 has failed to create credit growth as banks have shrunk balance sheets, securitization markets have not opened up fully, consumers have de-leveraged and company's have turned to bond markets.

Other than Japan he doesn't think Asia will benefit due to govts unwilling to let their exchange rates float freely (Indonesia probably still too small for him to notice). However, the rupiah is one currency is Asia that is clearly still very undervalued. We have revised our year-end exchange rate forecast to IDR8,025/USD (from 8,190 previously) for a 12% appreciation in 2011. You want to buyer of domestic consumptions names. Our top picks: Holcim, Mapi, Gudang Garam, Clipan finance and Mandiri.