Despite our less-than upbeat view of the immediate investment horizon, we see some bright spots. First, it is widely expected that Indonesia will achieve investment grade credit rating over the next 12 months. We believe this will trigger renewed focus on the country and will spur interest in FDI and will further drive down the cost of debt. Achieving investment grade will be a testament to the prudent macroeconomic policies by the Central Bank and fiscal reforms over the last 5 to 10 years.
Second, the Land Acquisition Reform Bill is expected to be approved by parliament in the first half of 2011. The passing of this bill is crucial for the much-needed development of land infrastructure projects in the country. The sustainability of Indonesia’s high GDP growth rates is increasingly dependent on the development of its infrastructure.
For equities, we believe 2011 will be a year for stock-pickers. Against the backdrop sketched above, we like companies in the commodity, infrastructure and property sectors. In the commodity space, we see opportunities in selected coal companies as we believe the demand and supply balance for coal will swing in favour of producers over the next 2 years. And we continue to focus on well-run companies with strong business models trading at attractive valuations and out-of-favour stocks.
For fixed-income, we expect a more cautious tone in 2011. With the inflation spike, investors are concerned that BI is behind the curve and would put pressure on the local bond prices. In addition, given the sizeable bond holding by foreign investors, a small trigger, domestic or external, could cause a big movement in the bond market. We are underweight duration and would opportunistically accumulate the government bonds when the yields rise. We continue our positive view on quasi-sovereign and high quality corporate bonds, which can offer the yield enhancement to the portfolio.