Top Indonesia Fund Sees Jokowi Fueling 17% Stock-Market Gain

Aug 27, 2014 5:38 am ET

(Updates with closing prices.)

Aug. 27 (Bloomberg) -- Indonesia’s top-performing stock picker says the nation’s benchmark index will probably climb as much as 17 percent to a record by next year as President-elect Joko Widodo takes steps to revive economic growth.

The Jakarta Composite Index may rise to 6,000 by the end of 2015 to exceed its all-time closing high of 5,214.98 in May 2013, said Arief Wana, who runs PT Ashmore Asset Management Indonesia’s Dana Progresif Nusantara fund and favors shares of health-care and financial firms. The fund, established in February 2013, has returned 50 percent in the past 12 months, the most among 33 local peers with at least $100 million of assets, versus the benchmark index’s 30 percent gain.

Widodo, the outgoing Jakarta governor known as Jokowi, takes office in October after pledging to prioritize spending on health care, education and infrastructure while cutting government energy subsidies that have swelled the budget deficit. He set a target last month of boosting economic growth to 7 percent within two years, up from 5.1 percent in the second quarter.

“The market’s focus is on how the new government manages this stabilizing period for the economy, before they move on to full-on growth-acceleration mode,” Wana, whose fund oversees the equivalent of $153 million, said in an Aug. 25 interview in Jakarta. “Health care and financial services will be the beneficiaries of the next government’s policies.”

Import Substitution

The Indonesian stock gauge advanced 0.4 percent to 5,165.25 at the close in Jakarta, the first gain in four days.

Ashmore’s holdings include PT Siloam International Hospitals, a Tangerang, West Java-based hospital operator, and PT Bank Mandiri, the country’s largest bank by assets, Wana said. Siloam shares rose 1.4 percent today, the steepest advance since Aug. 14. Mandiri climbed 0.7 percent, the most in two weeks.

Wana’s estimate for gains in the Jakarta gauge is more optimistic than the 7.1 percent projected increase over 12 months derived from analysts’ share price-targets for index companies compiled by Bloomberg.

Southeast Asia’s biggest economy slowed in the quarter ended in June as mining, exports and government spending contracted. Gross domestic product will probably expand 5.2 percent this year and 5.7 percent in 2015, according to median estimates of economists surveyed by Bloomberg.

Huge Potential

Jokowi’s plan to boost growth may be derailed by his proposed import-substitution measures, which could cut the country off from the global supply chain, increase protectionism and leave industries uncompetitive, according to Arianto Patunru, an economist at Australian National University in Canberra.

One of the new president’s first challenges is a 2015 budget from the outgoing government that includes $31 billion of spending for energy subsidies, which may be a drag on his spending program.

Jokowi has pledged to expand infrastructure by building 2,000 kilometers (1,243 miles) of new roads and 10 seaports. He also wants to expand a Jakarta program providing health insurance to the poor. That could propel a surge in earnings for health-care companies such as Siloam International, according to Wana.

Indonesia’s health-care spending equaled 3.03 percent of GDP in 2012, less than the 3.91 percent average in 10 Southeast Asian countries, according to data compiled by the World Bank.

Bank Rally

Siloam International has climbed 57 percent this year and trades at 154 times projected 12-month earnings, the highest level in Asia, according to data compiled by Bloomberg.

“The potential is really huge for hospitals,” Wana said. “Health care is an underpenetrated industry.”

PT Kalbe Farma, Indonesia’s largest drugmaker by market capitalization, has advanced 33 percent this year and is valued at 31 times forecast profits, the highest among drugmakers in emerging Asian markets.

The Jakarta index trades at a multiple of 15.1, near the most expensive since May 2013 and a 33 percent premium over the MSCI Emerging Markets Index.

Demand for financial services will rise as Indonesia’s population of 254 million grows wealthier, Wana said. Average annual incomes in Indonesia have climbed about 34 percent in the past five years to $9,559.

Bank Mandiri has advanced 34 percent this year and trades at 11 times forward earnings, compared with the Jakarta Finance Index’s 10.7 multiple.

“As people get better income, they will pay more attention to health care and start getting into financial products,” Wana said.