Weekly Report – April 30 2007

30 04 2007

Weekly Outlook: Attention this week may turn back to domestic inflation with the announcement of April’s inflation figure on Tuesday. In this regard, we are forecasting deflation of 0.02%. Other factors are also positive. Investment is picking up. Liquidity is high and demand for equities is strong. As such, the JCI may be able to stay above the 2,000 level this week. On the currency front, the rupiah is likely to remain firm and hover around 9,100 to the greenback.

The JCI breaks through the 2,000 level. A memorable week for Indonesian stocks as the JCI breaks through the 2,000 level for the first time in its history. Newsflow is positive with encouraging 1Q07 earnings by banks in particular boosting sentiment. Lending growth is accelerating as interest rates come down, stimulating the economy. Deposit rates at some major banks have now been slashed to below 7%. The latest banks to report better performance are micro lending specialist Bank Rakyat Indonesia (BRI), Bank Danamon and Permata Bank. For BRI, for example, its loan book grew 19 percent to Rp 91 trillion in 1Q07. Bank Danamon, meanwhile, saw a 92 percent surge in after-tax profits on an 18 percent increase in its loan book to Rp 43.1 trillion as of the end of March. Loans growth at Permata Bank reached 7 percent, bringing its loan book up to Rp 23.8 trillion as of the end of March. Besides banks, mining stocks remain in the spotlight on the back of high commodity prices. Bullish regional sentiment and news that the Dow stormed through the 13,000 level has added to the positive sentiment. Over the week, the JCI ended up 50.95 points at 2,019.68. Average daily trading value reached Rp4.4 trillion, again showing strong appetite for stocks, while foreign buying on the JSX reached Rp2 trillion over the week.

US stocks retain their upward momentum. Strong corporate results continued to boost market sentiment in the US. Last week it was the turn of 3M and Boeing to come up with strong first quarter results. M&A activity continued to help boost market sentiment. Such deals raised confidence among investors that share prices are still at attractive levels, helping investors to shrug off concerns over the rather uncertain prospects for the US economy. Economic expansion in the US is slowing, with GDP growth reaching only 1.3 percent (annualized) in the first quarter of this year. This is down significantly from the 2.5 percent growth rate in the fourth quarter of last year. All major stock market indices gained ground over the week. The DJIA added 1.2 percent to 13,120.94, while the broader Standard & Poor’s 500 Index rose 0.7 percent to 1494.07. The tech heavy Nasdaq Composite Index climbed 1.2 percent to 2557.21, its highest level since February 2001.

Sentiment on the JSX should remain positive this week. Attention this week may turn back to domestic inflation with the announcement of April’s inflation figure on Tuesday. In this regard, we are forecasting month-on-month deflation of 0.02%, with the year-on-year inflation rate falling to 6.45%. If this forecast turns out to be accurate, and there is indeed deflation, it should pave the way for the central bank to cut interest rates further even though BI had previously opted to keep its benchmark interest rate unchanged at 9.00 percent. We have discussed the reasons for BI’s cautious stance in this regard before, and believe that BI does not have to worry about creating excessively strong domestic demand in the economy:unemployment levels are still very high after all. Such a prospect of more rate cuts would boost confidence in the stock market further since lower interest rates are an important catalyst for brisker economic growth – historical data shows that the economy tends to move up a gear when interest rates are below the 10 percent level. Indeed, our latest report entitled “Slower-than-Expected Growth in 2007?” provides compelling evidence that Indonesia’s economy is clearly on an expansionary path despite some concerns of a lethargic economy in the first quarter of 2007.


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