Mining Sector Looking Relatively Attractive

We expect the Indonesian mining sector to outperform the benchmark Jakarta Composite Index as investors have recalibrated their expectations following the mining ban that was enacted in January this year, while the government appears to be making concessions regarding strict mining regulations. Indonesia's mining sector is presently in a state of disarray as investors, both local and foreign alike, remain on the sidelines as they await greater clarity regarding the new government's policy trajectory, but this appears to already be priced into the market.

The Jakarta Mining Index has taken a heavy beating over the past few years. Indonesian mining stocks have increasingly lost their allure as rising nationalism has diminished the attractiveness of mining investment, which has also not been helped by falling commodity prices, particularly in 2013. While impediments to growth in the mining sector still clearly exist, it does however appear that the mining index has bottomed out as investors have likely realigned their expectations. The index is up almost 17.0% since the trough it hit earlier this year. While the benchmark index may have registered similar gains, its recent uptrend is starting to look somewhat laboured. While we may continue to see further overall gains in Indonesian equities, we believe the scope for further gains is likely to be capped as the Indonesian economy continues to rebalance.

On the flip side, from a technical perspective, mining stocks are just starting to come off their multi-year lows and still have some way to run. Fundamentally, despite the uncertainty surrounding the mining sector, the government appears to have been making concessions with regards to mining regulations. In recent weeks, mining authorities have reportedly agreed to peg export taxes to progress made on the construction of smelters, instead of instituting a high tax rates of certain resource exports right from the start. This means that mining companies that recently halted production could restart production, and by extension, shipments could resume. Furthermore, there remains a possibility that mining reformist presidential candidate Joko Widodo may tone down the country's recent nationalistic policymaking leanings in recent years, which would certainly carry positive effects for the mining sector. We consequently believe that the recent outperformance in Indonesian mining stocks could still have some room to run.

Reversal In Play
Indonesia - Jakarta Composite Index (JCI), Jakarta Mining Index(JAKMINE) & Ratio (RHS)

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Geography: Indonesia

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