Fund Managers Betting on Indonesian Stocks to Outperform Bonds

Fund managers say they are likely to reduce their holdings in Indonesian bonds after last year’s strong gains and plan to raise their stakes in equities on expectations that corporate profits will increase further this year.

“Yields in fixed-income assets will narrow. Fund managers might move some of their funds to the equity market to look for more profitability,” said Ruben Sukatendel, an investment manager at BNI Asset Management, which oversees Rp 5 trillion ($556 million) in funds.

“Looking forward, fund managers might go 50-50 between the equity market and bond market,” he said. “Of course, it will be adjusted from time to time, depending on the market movement or when our market valuation is already too high, but it will not be far from 50-50.”

Bonds, especially government securities with longer-term maturities, gained in 2011 as international investors sought better returns than equities and other fixed-income assets.

Indonesia got a boost late last year when Fitch Ratings raised its rating on the country’s debt to investment level for the first time since 1997.

Moody’s Investors Service last week followed Fitch’s move, strengthening Indonesia’s position as a favorite among overseas investors for emerging-market debt amid the euro zone debt crisis that threatens to curtail global economic growth.

ETrading Securities said in a recent research report that the country’s declining risk as a consequence of upgrades on sovereign debt is likely to bring down borrowing costs for Indonesian companies, and that will lead to higher corporate profits.

In the corporate bond market just a few years ago, bonds with five-year maturities had yields of around 9 percent, data from the Debt Management Office at the Finance Ministry showed. Now, five-year bonds yield 8-9 percent, Ruben said, and with yields likely to decline further the bond market will become less attractive in terms of profitability.

Adira Dinamika Multi Finance, one of the nation’s largest financing companies, has Rp 238 billion in bonds that mature this October and yield 8.35 percent, which is higher than the 3.6 percent yield for comparable 1-year government bonds.

Dividends also make stocks an attractive investment. Adira’s stock has a 7.89 percent dividend yield, based on last year’s payout and its latest share price. Adira’s stock has risen 3.3 percent this month, extending last year’s 5.8 percent advance.

Still, the equity market faces risks at the moment, Ruben said.

“The concern is still about the European and US economies. The US economy is still very slow in recovering, while the euro zone debt crisis is still unclear on its solution,” Ruben said.

Bonny Iriawan, a director at Schroders Indonesia with Rp 62 trillion in assets under management, said that investors will be selective in bonds but the overall long-term prospects in the fixed-income market remain positive.

“For long-term investing like pension fund investors, it is still very positive. They will have to invest, and with Indonesia’s investment grade status, it will be very prospective,” Bonny said.

The benchmark Jakarta Composite Index has gained 4.5 percent this year and is 5 percent from its all-time closing high of 4,193.44 set on Aug. 1. Last year, the stock measure closed up 3.2 percent.

Bonny and Ruben believe that fixed-income assets will continue to be held by investors, in a nation in which fixed income is a bigger market than stocks. Bonds tend to be less risky than equities and longer maturities offer a more attractive return than savings rates. By comparison, commercial banks on average offer one-year deposit rates at 6.94 percent, according to Bank Indonesia data.

“We have to remember that Indonesian investors are typically conservative and moderate in taking risk. So demand for fixed-income market will still be strong,” Ruben said.

Source :
Jakarta Globe, 24 Januari 2012
http://www.thejakartaglobe.com/business/fund-managers-betting-on-indonesian-stocks-to-outperform-bonds/493371