Jim O’Neill: What Jokowi’s Win Means For Jakarta’s Market? – by Shuli Ren (Baron’s Magazine – July 23, 2014)

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The following is a guest post by my colleague Assif Shameen:

“Jokowi’s victory is potentially as important as Modi’s was for India,” says Jim O’Neill, former Chairman of Goldman Sachs Asset Management and the man who coined the term BRICs or the world’s largest emerging markets. O’Neill has long regretted not including Indonesia among the emerging giants.

As the world’s third largest democracy, O’Neill says Indonesia can’t just be dependent on the global commodities cycle. “Indonesia has huge potential and a guy like Jokowo could just be the one to unleash it but he has to be bold and take on vested interests and those that allow corruption as well as other forms of misallocation of capital,” he says.“Indonesia needs a Modi-type figure to galvanize its young dynamic population to deliver on its potential,” O’Neil says.

But the former Goldman Sachs economist notes “expectations in Indonesia are now as high, if not higher than they are in India” in the wake of Jokowi’s victory. “India and Indonesia now need to deliver or otherwise the scope for disappointment in both places is obvious, specially in the short term. If the changes are for real in Indonesia and India then the case for further re-weighting in both those markets is huge,” he says.

Year-to-date Jakarta Composite Index is up 21.1% . The market has risen 9.1% over the past 12 months. But stocks may have gotten ahead of themselves. Sam Le Cornu, Senior Portfolio Manager at Macquarie Funds Group who co-manages the Macquarie Asia New Stars Fund in Hong Kong says while the macro picture in Indonesia looks encouraging the only problem now is valuations. “At nearly 16 times forward earnings, the market just looks a little expensive to me right now,” he says. Jakarta stocks which trade at a 20% premium to their 10-year historical average are now not too far from their early 2008 peak valuations of over 16.5 times forward earnings, he notes. Consensus estimates for earnings growth have been revised down to just over 10% this year and 12% next year.

Le Cornu says he wouldn’t be surprised if the market continues to rally from current lofty levels on positive newsflow but adds that investors have already baked in positive outcome of a reformist Jokowi Administration. “I would be a buyer of Indonesian stocks if they corrected and came off 20 or 30% from current levels,” he says.

The Macquarie portfolio manager likes consumer discretionary which he describes as “a stand out sector”. What stocks look good? “I would be buying Ace Hardware Indonesia, Matahari Department Store as well as Matahari Putra Prima, the hypermarket operator,” he says.

For the rest of this article, click here: http://blogs.barrons.com/emergingmarketsdaily/2014/07/23/jim-oneill-what-jokowis-win-means-for-jakartas-market/