Analysis: Activities in Europe and their impact on Indonesia
Harry Su, Bahana Securities | Thu, 07/15/2010 10:56 AM | Business
JP
The evidence, undeniable and increasingly unavoidable, continues to mount. Europe is heading for weaker economic recovery in the second of 2010. Testimony to this is business surveys in the eurozone which are pointing to lower confidence on the back of the announced fiscal austerity measures.
Worrying is the purchasing managers’ indices (PMI) for the 16-country region, which covers manufacturing and services and is regarded as an early guide to trends in economic activity, having fallen for the second month running in June. Additionally, the EC Economic Sentiment Indicator (ESI) appears to have stagnated.
As a result of rising unemployment, government spending cuts and higher taxes, consumer confidence in the PIIGS ( Portugal , Ireland , Italy , Greece and Spain ) countries has fallen sharply, reflecting weaker private consumption ahead.
As a result, inflationary pressure in the eurozone has remained muted at 1.4 percent in June — the annual rate reportedly remains low by US and UK standards. The low CPI is probably caused by a drop in energy inflation.
Having said that, it is possible that we could see oil price fall to around US$60 per barrel by the end of the year on worsening second semester economic outlook in the eurozone coupled with continued tightening in China .
The most important implication for Indonesia on lower oil/commodity prices would be the country’s supplier role of natural resources. This means a double whammy for Indonesian exporters given that the rupiah has strengthened around 5 percent against the US dollar.
For the equity market, this translates to continued avoidance of dollar earners, even the more resilient CPO and coal space in our view. We expect their market underperformances to continue for the rest of the year as investors continue to focus on domestic plays.
On local exposure, we continue to like banks, consumer and telcos, particularly as we expect continued strong second quarter corporate earnings results. Even the intensely contested telecom sector is seeing a pick up with Excelcomindo reportedly booking 35 million subscribers as of June 2010, compared to our year-end estimate of just 34.1 million subs. Telkomsel is also reportedly on target to achieve its 100 million subscriber target in 2010, after having reached 88 million subscribers in the first half this year.
Therefore, while external volatilities will remain, and Indonesian exporters will be adversely impacted, domestic-driven companies remain investible, offering a safe haven for investors.
The writer is senior vice president and head of Indonesia research at Bahana Securities
