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1/25/2012 11:58:36 AM:

Expect a Good 2012, But Be Ready for a Few Bumps

In 2012, the Jakarta Composite Index will have a generous year but will ride the roller coaster once more due to political and economic uncertainty in Europe. Unsettling volatility and to some extent poor market liquidity will amplify the fun.

There is no quick solution to the EU crisis, which grows more complex every day. Policy-makers only came up with half-hearted approaches because they had to keep their constituents happy, so it seems the European Union is not ready make the changes needed.

We must think of the EU crisis as more of a marathon than a sprint. Unfortunately, the EU market is significant and will create unsettling volatilities globally. Every member state has a vote and a single member can block efforts to implement the European Financial Stability Facility bail out fund, shocking global markets.

Turbulent times are ahead as the euro zone crisis, a decelerating Chinese economy and a sluggish US economy mean central banks will continue to maintain low rates and possibly implement more quantitative easing stimulus. It will be years before Europe, the United States and Japan can escape the trap of high debt and low growth, a stark contrast to the Indonesian economy.

Global liquidity is decreasing and global trading volume has been thin. Meanwhile, global investment banks have toned down market making activities. This thinly traded environment will continue next year. As Indonesian capital markets continue to be induced by global risk-on and risk-off modes, the swings will be greater amid less liquidity.

Despite there being less liquid, the real economy in Indonesia will continue to grow, backed by foreign direct investment and domestic consumption. The World Bank predicts it will grow by between 4.1 percent and 6.2 percent next year with inflation remaining benign at 5.6 percent. The bank has been advising the government to spend more.

Domestic production will outperform export-oriented industries due to low demand from rich countries. The upcoming passage of a land clearance law will benefit toll road operators, cement manufacturers, contractors and landed property developers. However, the depressed price of commodities will continue to challenge the metal mining and coal sectors.

The stock market will rise from the current level-3,702 at Thursday’s close-to a 4,000-4,600. At present, the equity market looks relatively cheap. Investing in equities is very attractive as Bank Indonesia has shown it is bullish about staving of a slowdown by reducing rates by 75 percentage points in the last two months.

In a nutshell, the ride in 2012 won't be smooth and in fact, we will likely experience occasional turbulence, exacerbated by poor liquidity and fear of global contagions. But we will arrive at the destination safely and soundly.



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