JAKARTA, Nov 20 — Indonesia’s biggest stock market rally since 2010 is losing support from corporate earnings as they trail estimates by the most in two years and analysts reduce projections for next year.

While the Jakarta Composite Index surged 20 per cent in 2014 through yesterday on optimism President Joko Widodo will boost infrastructure spending, net income at companies in the gauge trailed analyst forecasts by 89 per cent in the third quarter, the most since March 2012. Projections for 2015 have dropped by more than 9 per cent since December to the lowest level this year, according to data compiled by Bloomberg.

The Jakarta gauge closed at a seven-week high yesterday after Widodo delivered on his election promise this week to raise the price of subsidize\sd fuel and free up funds for health- care, infrastructure and social security programs. The rally won’t last because rising energy costs will fan inflation and equity valuations are getting expensive, said Alan Richardson, whose Samsung Asean Equity Fund beat 96 per cent of peers in the past five years.

“The stock market’s rise from the fuel price hike won’t be sustainable,” Richardson said in an interview from Hong Kong. “I would be underweight Indonesia.”

The benchmark index fell 1 per cent, the most in Asia, to 5,078.92 at 10.58am  local time as PT Astra International, the country’s largest automotive distributor, lost 4.2 per cent. The Jakarta gauge is valued at about 14.8 times projected 12-month earnings, a 16 per cent premium over its 10-year average multiple, according to data compiled by Bloomberg.

Quickening inflation

Inflation will accelerate to between 7.7 per cent and 8 per cent this year, versus an average 6.4 per cent so far in 2014, according to Bank Indonesia. The monetary authority raised its policy interest rate for the first time this year on Nov. 18, a day after Widodo, known as Jokowi, said he would increase the price of subsidized gasoline to 8,500 rupiah (RM23.50) a liter from 6,500 rupiah.

Gross domestic product, which grew at a slower-than- estimated pace of 5.01 per cent in the third quarter, will probably weaken further as energy costs rise, Jeffrosenberg Tan, a fund manager at PT Sinarmas Asset Management, said on Nov. 6.

“We believe growth is slowing down,” Rahul Chadha, co- chief investment officer at Mirae Asset Global Investments Ltd., said in an interview in London on Nov. 11. “We are yet to see the lows.”

‘Not overvalued’

While Richardson has an underweight position in Indonesian shares in his US$91.2 million Samsung Asean Equity Fund, he said the nation’s construction, health-care and consumer staples companies will benefit as the government shifts spending away from fuel subsidies.

The Jakarta Construction, Property and Real Estate Index has jumped 41 per cent this year, the most among nine industry groups. Shares of PT Pembangunan Perumahan and PT Waskita Karya, the second- and third-largest state-owned construction companies by market value, have surged more than 150 per cent as investors bet Jokowi’s infrastructure drive will boost earnings.

“Given the performance of the market, it is indeed more expensive today than a year or two ago,” Ong Tek Khoan, managing director at Templeton Emerging Markets Group, said in a report dated Nov. 13. “However, we do not believe Indonesia’s market is overvalued yet, provided the macroeconomic environment remains stable.”

The increase in fuel prices will be a short-term drag on corporate earnings, Joshua Tanja, the head of research at UBS AG, said on Nov. 18. Consumer staples companies, retailers and auto distributors all face a “temporary hit,” Citigroup Inc. analysts led by Ferry Wong wrote in a client note yesterday.

“The numbers from the third quarter all pointed to lower growth,” Sinarmas’ Tan said. “It looks like the purchasing power in the low- to middle-income group continues to deteriorate. After the fuel-price increase, it will likely slow further.” — Bloomberg