Market continues its horizontal move, down -0.1% last week. Indonesia is now out from the top 3 panel, with only 13.4%, lower than India’s 18.6%, the Phillipines’ 16.2% and Thailand’s 14.2%. Based on recent overseas marketing trip, foreign investors continue to play wait and see game, and some have slightly trimmed down their position to Neutral. As most investors prefer to wait until the release of the election quick count on 10 July, before deciding their next move, market liquidity will continue to remain dry. Foreign inflow in June only reached Rp2.2t, the lowest level so far this year. With potentially higher inflows, a liquidity game would ensue, and, as such, we recommend the purchase of bigger cap companies such as large banks: BBRI, BBCA and BMRI, as well as ASII and TLKM.
No longer on the top 3 panel
With various pools continued to show a slimmer gap between the two presidential candidates, coupled with inexorable IDR weakening and rising oil price, appetite on Indonesia equity market remains lethargic. As most investors continue to stand on the sideline, there has not been any clear direction on the market. Last week, JCI continued its horizontal movement, down -0.1%, with Thailand is now taking over the third position. It has been a consecutive two week of lower position for JCI, after leading the regional market performance couple months back. In our view, market movement will continue to remain indecisive until next week. If the winner on next month election were market’s favorites, there’s likelihood for Indonesia to regain the top position, catapult by higher inflow which drive up valuation as well as IDR strengthening.
Foreign investors continued to play wait and see game
We undertook a one-week marketing trip to KL, Singapore and Hong Kong. Based on our meetings, the uncertainty over the outcome of next month’s elections is the main reason why most investors are staying on the sidelines. Some investors have trimmed their positions to Neutral and have aligned themselves into more defensive strategy. Most clients still favor Jokowi given his cleaner background and the potentially progressive reforms he might implement. Yet with the election result still uncertain given Prabowo’s rising popularity based on recent polls, most investors prefer to wait until the release of the election quick count on 10 July, before deciding their next move. As such, investors may prefer to add to their positions once confirmation of Jokowi’s victory is known, rather than taking the risk of accumulating now despite the market’s recent weakness.
Trading liquidity remains dry
Continued low trading liquidity epitomized the current low appetite on Indonesian. Market liquidity drifted lower at MTD average of Rp5.0t/day, almost similar with Jan’s level which usually the lowest month. Back in Mar and April, daily turnover was at Rp7.1-7.5t/day, a situation that would re-occur post the election next month. In our view, as most investors had stashed up cash, there will be considerable improvement on liquidity post the election if Jokowi wins next month. Foreign inflow and outflow has intermittently ensued in the past four week with June inflow only reached Rp2.2t, the lowest level so far this year.
Bigger cap companies are the best play on higher liquidity
With potentially higher inflows, a liquidity game would ensue, and, as such, we recommend the purchase of bigger cap companies such as large banks: BBRI, BBCA and BMRI, as well as ASII and TLKM. Not only do these stocks have ample liquidity, but they are also arguably some of the best managed companies in Indonesia. While a Jokowi defeat would likely trigger a market de-rating, those bigger cap companies should perform better in the medium to longer term, in our view, as they have the proven ability to emerge from crises in the past, and be even stronger. The IDR will also strengthen - which will positively impact consumer companies. Construction companies will also do well, and they may potentially enjoy a peak valuation of 21x. We have been Neutral on the market since mid-May with a bottom-up index target of 4,940. If Jokowi wins, we expect the market to go up to 16.4x PE (half standard deviation above the mean valuation of 14x) by year-end 2014, translating into an index target of 5,248.
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