Triple Play Approach

UBS Country Head Rajiv Louis has some clear views on how to invest in a cloudy global market.

After great numbers last year—a stock market up 46% on an economy that expanded 6%, Indonesia is once again facing volatility and uncertainty. The stock market is down some 3% since January 1, while unrest in the Middle East has driven oil prices up over $100 (despite being an oil producer, Indonesia is a net importer). Adding to the uncertainty is the fallout—literally and figuratively—from Japan’s terrible earthquake and tsunami.

So how should Indonesian investors position themselves for the rest of the year? Rajiv Louis, country head and managing director of investment banking for the Indonesia operations of Swiss banking giant UBS, has some ideas. Appointed in December as country head, Louis has more than 15 years of experience in the financial services industry in Asia and for the past seven years has headed UBS Indonesia’s investment banking division.

He recommends three major themes for investment: “Consumption, infrastructure and coal—although coal to some extent may fluctuate right now because of the rising oil price,” says Louis, 40. For the first theme, consumption, Louis has some broad recommendations: “Noodle makers such as Indofood Consumer Branded Products, pharmaceutical companies such as Kalbe Farma and consumer companies are good investments for that consumption play. Inflation is not a worry. Indonesian companies, especially the big ones, have good pricing power,” he says. So even though their costs are rising they are able to pass on higher prices to consumers.

The second theme, infrastructure, is in “the hands of the government,” he says and notes the government is making the right pronouncements about major investments into the sector. At UBS’s annual Indonesia conference in March, Finance Minister Agus Martowardojo ticked off a list of projects that the government is planning, such as a 2,000 megawatt steam power plant in Central Java, the construction of drinking water facilities in Umbulan, and a 30 kilometer airport railway from Manggarai rail station in South Jakarta to Soekarno-Hatta International Airport (which has been on the drawing board for several years).

Another item that may give investors confidence is the finalization of the land acquisition law. “We expect this law under the current timetable should be confirmed and then approved in July,” says Louis. If that happens, he says, then big companies like automaker PT Astra International will go to the next level of growth. Other beneficiaries could be PT Jasa Marga, the state toll road operator, and retailer Alfamart, because better roads will bring down distribution costs. If the government is able to overcome various obstacles in infrastructure then economic growth could even reach 8%, to match China’s and India’s growth rates, by 2013, he notes.

In the commodity sector, coal and palm oil still look attractive. But with oil prices above $100 a barrel, this sector has it own positive and negative sides. In short term, oil price hikes will lift coal and palm oil prices too, but in the long run higher energy prices are bad for consumers, says Louis. The rise in oil prices will be alleviated somewhat by the strengthening of the rupiah, around 8,800 rupiah to the dollar, up from 9,000, and Louis adds it could rise even further to 8,000. The higher rupiah makes oil and other imports cheaper.

However, he warns that if oil rises by another $20 and it stays at that level, then global growth projections will be slashed to 3.5% from the current 4%. The Indonesian government, which spends heavily on energy subsidies, is considering taking the unpopular step of reducing subsidies (which would raise energy prices). The government almost took this step in early March but delayed the move.

Besides those three sectors, Louis also highlights the financial sector such as banks and insurance companies. With income approaching $3,000 per capita, there will be more disposable income, which will be handled by the banks. Other than stocks, UBS is also recommending government bonds. With the lower global growth prospects due to higher oil prices, he sees the possibility of money coming out of equities and into fixed income: “Investors are telling us that they are very confident in the government and what is happening in Indonesia so they are putting their money in government bonds.” The recent weakness in the Indonesian stock market should be taken in stride, he says, as it is natural for investors to take some profits after major gains last year.

* This story–apart of Investment Guide theme– appears in April 2011 issue of Forbes Indonesia magazine.

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