By Fransiska Nangoy
JAKARTA (Reuters) - Indonesian stocks are on a roll - with 18 percent gains this year and a boost from President Joko Widodo's economic reforms - and yet, investors worry about buying more of a market hitting historic peaks.
The Jakarta Composite Index <.JKSE> is Asia's second-best performer in dollar terms this year but its winning streak has turned share valuations uncomfortably rich.
The ratio of the average price to 12-month forward earnings for Indonesia's MSCI index <.MIID00000PID>, or the PE ratio, is 16.44 - well above its historical average of 12.4 and at its highest since 1999.
The rally has come at a time when policymakers are more conservative about growth projections for Southeast Asia's largest economy even though the economy surprised on the upside in the second quarter helped by solid consumption.
Lower fiscal spending, weak corporate earnings and uncertainties over the success of the government's tax amnesty program aimed at improving state revenue are now clouding Indonesia's growth prospects.
"Everybody is nervous because of that, and valuation has peaked for now," said Ivan Chamdani, fund manager with Maybank Asset Management in Jakarta.
"As a relative fund manager, I think it's wise to reduce volatility due to climbing valuation, but no reason yet to raise your cash levels."
The stock market PE ratio is trading well above the first standard deviation of its historical mean, which hints at it being overbought, and above levels at which it reversed trend in 2007, 2013 and 2015.
The stock run has been encouraged by a stable currency, expectations the tax amnesty will bring home billions of dollars, appointment of a reformist finance minister and a delay in the U.S. Federal Reserve's possible rate rises.
Foreigners bought a net 39.47 trillion rupiah ($2.98 billion) of Indonesian stocks in the year to Aug. 23, their purchases jumping threefold in the weeks after the tax amnesty bill was passed in late June.
Yet, memories of the shock market sell-off in 2013, when the Fed first raised the possibility of tapering its stimulus, and China's surprise yuan devaluation in 2015, are making investors chary.
Earnings too have not kept pace with expectations. Conglomerate PT Astra International <ASII.JK>, the fifth-largest by size on the Jakarta index, has been posting profit declines since 2014 and its profit in the first half of 2016 fell 12 percent.
Property firm PT Lippo Karawaci's <LPKR.JK> first-half profit fell 36 percent. Indonesia's growth this year has been around 5 percent. Newly-appointed Finance Minister Sri Mulyani Indrawati has warned that reaching a targeted 5.2 percent growth this year would be tough, while the central bank lowered its growth estimate.
Investors are waiting for clarity.
"The market should move within a narrow range as long as there's no significant headwind," Chamdani said.
Bharat Joshi, director at PT Aberdeen Asset Management in Jakarta, said he would like to see some recovery in motorbike sales and instant noodles sales, which would indicate a pick-up in domestic consumption. Motorbike sales <IDMBKY=ECI> in August fell 28 percent from a year earlier.
"Earnings have to deliver. I'm going to look for another credible earnings improvement," Joshi said. "Otherwise, if the third quarter disappoints, maybe the market will be bound for a crash."
($1 = 13,240 rupiah)
(Editing by Vidya Ranganathan and Jacqueline Wong)