Asia Equity Focus Indonesia: A compelling long-term structural story with midterm triggers - Credit Suisse

Indonesia: Gain exposure to stocks as a proxy to domestic consumption and infrastructure building
Indonesia is one of the few countries that did not experience negative growth during the global financial crisis, thanks to resilient domestic demand. Politically, the country now looks more stable than it did in the past and also compared to its Southeast Asia peers, Thailand and Malaysia. The government of Susilo Bambang Yudhoyono is serving a second five-year term and the next set of elections is not due until 2014.

Over the last year, the JCI has posted a strong performance of over 250% after the market trough during the credit crisis and the key question now is whether the equity market has the scope to continue its outperformance.
In our view, Indonesia remains a compelling long-term structural story and we see two key catalysts. First, we believe the passage of the land reform bill is a critical step towards easing Indonesia’s infrastructure bottleneck. This would enable the country to start moving towards a higher investment cycle and achieve higher economic growth. The land reform bill is currently being discussed in parliament and the market is expecting this bill to be passed in H2 2011 or early-2012. Second, given the improvement in fiscal strength and external liquidity, we believe that a further upgrade of Indonesia's credit rating to investment grade is likely. As Indonesia's sovereign rating moves to investment grade, we believe this could potentially attract more foreign investment into the market and should also add to the currency (IDR) gains.

With banks and consumers remaining largely undergeared, we see room for the economy to leverage up. On the earnings front, consensus earnings forecasts indicate strong earnings growth, with 20% in 2011 and 18.5% in 2012 – clearly above emerging market expectations and potential and before any positive implications arise from the reduction of the infrastructure bottleneck after the potential passing of the land reform bill. In terms of valuation, the market is trading at a 12-month forward P/E of 13.2, close to its five-year average despite better growth and positive surprise potential. Easing inflation, accelerating domestic consumption, low credit penetration and the potential upgrade of Indonesia's sovereign rating to investment grade give the equity market further support. Against this backdrop, we have increased our recommendation for Indonesia from neutral to overweight. We recommend investors gain exposure to Indonesian equities via index-replicating products or by focusing on our preferred consumer and infrastructure-related sectors. Our favorite stocks are Indofood Sukses Makmur (INDF IJ, BUY), Indosat (ISAT IJ, BUY) and United Tractors (UNTR IJ, BUY).