Market Outlook - The Show Continues

Indonesia still awaits the announcement of the formal count undertaken by the General Elections Committee, most likely on 22 July. Yet with several disputes reported in some regions, we believe that the decision will be referred to the Constitutional Court, with a final verdict expected to be made on 24 August. On the back of higher market liquidity and inflows, the market has been building on the expectation of a Jokowi victory. From our three themes related to this possible outcome, the IDR strengthening plays have lagged behind with only a 2% return (in 7 – 17 July), while the infrastructure plays have performed very well with a 11% return and the liquidity plays show a decent 7% return.

The count is progressing
With various quick counts showing conflicting results, all eyes are now fixed firmly on the real count. In our view, there are two critical events in the near term: first is the expected announcement by the General Elections Committee (KPU) on 22 July and the second is the final verdict by the Constitutional Court (MK) on 24 August in the event that KPU’s decision is appealed by either camp. The KPU has already started to tabulate the results at the district/city level before they are processed further at a higher level. However, with several disputes reported in some regions, we believe that the decision will be referred to the MK. Both candidates will have 3 days post the KPU announcement to submit their appeals, with final verdict from MK on 24 August. 

Addressing potential instability on palpable polarization
The presidential elections campaign has polarized public opinion, creating concerns over whether national stability could be safeguarded post the elections. In an attempt to clarify issue on the conflicting quick count results, the Indonesian Association for Public Opinion (Persepi) has reportedly summoned seven pollsters to demonstrate the validity of their research methods in undertaking their quick counts. The Indonesian Broadcast Commission (KPI) has also issued warning letters to all TV stations not to show any of the quick count results. Furthermore, it has also been reported that KPI warned both Metro TV (owned by Surya Paloh, Nasdem Chairman) and TV One (owned by Bakrie, Golkar Chairman) for not adhering to impartiality and non-partisan principles - as stated in the broadcast law.

Gaining more coalition support is equally important
Going forward, the new government will need to address several strategic issues, including making a tough decision on fuel price hikes given mounting pressure on next year’s budget. With the PDI-P coalition only controlling 37% of the legislature, the challenge is a tough one. While the permanent coalition declaration by 7 parties which support Prabowo-Hatta could pose challenges, several senior figures from parties within the coalition are reported to have given a signal for a potential switch to Jokowi’s coalition, if he indeed becomes the next president. While a stronger coalition might raise concerns of a transactional-nature in regard to cabinet formation, control over the legislature is even more vital for the new government to be effective, in our view

Brisker market activity; IDR strengthening plays are still lagging
With substantial improvements in liquidity and net inflows, we believe that the equity market has been building in the expectation of a Jokowi victory. In this scenario, we have been pitching three main themes: 1) a liquidity play on potentially stronger inflows and liquidity; 2) an IDR strengthening play for stocks such as the consumers and pharmaceuticals; and 3) an infrastructure play, through construction and cement. Of these three themes, the IDR strengthening plays have lagged behind with only a 2% return (in 7 – 17 July), while the infrastructure plays have performed well with a 11% return. The liquidity plays show a decent 7% return. We maintain our Overweight call on the Indonesian equity market with year-end index target of 5,248.
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