Commodity stocks rule monthly performance. The first seven outperformers in our list of top 40 biggest market capitalization monthly performances (Exhibit 1) are from commodity universe. Four out of our five top picks for December are within the seven outperformers. Inflation registered at 0.92% mom in Dec10, in line with our estimate (0.94% mom) but higher compared to consensus estimate (0.67% mom). Overall, 2010 consumer price rose by 6.96% yoy. Rising inflation is becoming emerging market phenomenon and the threat will continue t! his year. We are wary of interest-sensitive sectors such as automotives, banks, and property and we see energy sectors (including palm oil plantations) as the way to perform especially in the US, Europe freezing winter and Australia flooding. We still like Bumi Resources, Indika, London Sumatera, Sampoerna Agro and Medco Energy.
Rising inflation but stabilizing core still helps BI to keep rate for the moment. Raw food prices dominated the inflation in Dec10, with the price of rice, chilis, and cooking contributed almost 70% of monthly inflation. Meanwhile, core inflation stabilized at 4.28% yoy in Dec10, which mainly driven by increase in jewelry, housing rent, and transportation cost. Despite sharp increase in headline figure, stabilizing core inflation and concern on the adverse impact on capital flow would provide argument for the central bank to keep the benchmark rate unchanged at 6.5% in next governor board meeting (Wednesday 5/1), to our opinion. Indonesia’s total exports broke another record reached US$15.4bn or grew by 42.3% yoy in Nov10, partly supported by higher commodity prices. Imports, in the other hand grew by 48.3% yoy, led trade surplus to stay at US$2.3bn during the month.
2011 JCI target : 4,160. Harum Energy, Delta Dunia, Bukit Asam, Bumi Resources, and London Sumatera, tops the list of 40 biggest market capitalization performance for December. JCI ended the year at 3,704, posting 46.1% yoy increase. Top-down approach using 1999 nominal GDP and 1999 year-end JCI as the base, applying o! ur estima te for 2011 nominal GDP will give a JCI fair price at 4,380 (PER11F of 15.9x). Headwinds against achieving 4,380, we think mainly due to inflation threat which would block the advance of interest-rate sensitive stocks. Banking and consumer comprise 37 % of JCI weighting, hence assuming commodity continues upward, its weighting of 20%, can only partly compensate. Notice from Exhibit 3, JCI traditionally trade at a discount to its fair price. Assuming a 5% discount (2010 JCI year end position to its fair price of 3,880), index target for 2011 is 4,160 (PE! R11F of 15 ,0x, +1std deviation of 15 years PE-band).
Commodity stocks to outperform. We do not see much progress on the domestic front, Draft law on Land for Public Projects still has not making its way to parliaments, and government kept dragging its feet to lift fuel subsidy. We can only look out to global developments for reasons and hence our picks of commodity sectors.
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