Jakarta – The violence and political uncertainty enveloping Indonesia pose serious risks for the economy and investment, but those willing to take their chances could reap huge rewards.
Analysts say there is still plenty of room for stocks prices to move up, even after the index gained 70 percent through 1999, making it Asia's third strongest performer.
Many predict the benchmark composite index could reach 850 points this year, some 34 percent up from its current level of 635. Some individual stocks are expected to do much better, doubling or tripling in value.
It may not look too spectacular compared to last year's gains of 70 percent, so one should dig deeper into the market to be able to pick the right ones.
In addition to higher stock valuations as business and the financial position of companies improves, foreign investors stand to make a foreign exchange gain from the strengthening rupiah.
Some analysts predict the rupiah IDR could go up to 6,500 by year-end, or a ten percent rise from its current levels.
Many Indonesian stocks still trade at sharp discounts to their values before the Asian meltdown hit in mid-1997.
While this partly reflects the risk factor, analysts say many of the prices represent attractive valuations.
They point to a fall in the spread of Sovereign Yankee bonds over 10-year US treasuries to 490 basis points from 1,700.
"The spread basically reflects the degree of country risk," said Rino Effendy, an economist from Danareksa Securities.
The economy has shown some signs of recovery and the government's latest budget is forecasting a return to steady growth, a stronger rupiah, lower interest rates and inflation under control.
Growth is seen at 3.8 percent from April to December, after with an estimated 0.1 percent gross domestic product growth in calendar 1999 and a 13.7 percent contraction in 1998.
The major risk remains political and social, with communal bloodshed racking the country and a fractious military unhappy at seeing its political power eroded by reformist President Abdurrahman Wahid, Indonesia's first democratically-elected leader.
Analysts warn that separatist movements and religious tensions in several parts of the sprawling archipelago could hamper investment and the return of billions of dollars of private capital which fled the country during the past two years.
In the end this could mean a delay in economic recovery. They also warn the government must maintain cabinet unity and Wahid must keep the military on side and under control.
Wahid and his generals have continually denied speculation of a military coup, but the fear remains at the back of many people's minds and casts a shadow over the political climate.
For those willing to take the risk in return for potentially massive returns, analysts suggest looking at firms selling to the domestic market and – to a certain extent – those with significant debts but good business prospects.
These firms will benefit from the expected recovery in demand, lower interest rates and a stronger currency.
Sound blue chips, including cigarette makers, food producers, retailers, pharmaceuticals, telecoms firms and manufacturers are still seen as the safest bets.
But, banking on the improving economic outlook, some analysts also recommend selected stocks in heavy equipment, banking, finance and technology. These stocks, due to their higher risks, are where the strong gains can be expected.
"Also watch for stocks which have successfully completed or are close to completing debt restructuring," said ING Barings Securities' head of Indonesia research Laksono Widodo.
"This would significantly improve a company's financial position so that it would have larger room to grow." The darlings of investors during the economic crisis – dollar-earning exporters – are no longer strongly recommended.
"These stocks, despite their sound fundamentals, are not the kind of investment you look for during the recovery period," Widodo added.
During the crisis, exporters were top performers as they enjoyed the extraordinary gains in dollar-based sales despite lower or flat sales volume, reaping the benefits of the rupiah's plunge against the dollar.