Despite a lack of fresh catalysts, Indonesia’s equity market closed up
1.9%w-w, or in line with the regional markets which booked positive weekly
returns. Net outflows, however, continued into the second week of August, with
the MTD outflows reaching IDR1.29t. On the economic front, we believe the resumption
of exports by Freeport will help to ease concerns on the trade deficit. And
with the formation of the new government in October coupled with the
announcement of the new cabinet, we expect the stage to be set for further
market gains. Maintain Overweight with 5,248 year-end index target.
Still on the path of improvement
All
regional markets posted positive weekly returns, including the Indonesian
market which rose 1.9% w-w. In our view, there are still a lack of fresh
catalysts to bring about a significant re-rating of the market. The recent
macro data announcements also highlight the concerns, as seen in the continued
slowdown in GDP growth in 2Q14 and the high CAD of 4.3% of GDP. Nonetheless, we
still believe that Indonesia is on the right trajectory and we anticipate the
release of stronger macro data starting in October. With Freeport resuming
exports this month, the October export data release should see some
improvement, thus helping to alleviate concerns on a potentially worsening
trade deficit. It has been reported that Freeport received a quota to export
756,300 tonnes of copper concentrate worth USD1.56b. Also in October, the new
government will be installed and the president will announce his new cabinet.
These catalysts should help bolster confidence, providing room for the rupiah
to strengthen.
Weekly net outflows continued in the second week of August
Net
outflows continued with total MTD outflows reaching IDR1.29t. Nonetheless, this
figure does not look significant if compared to the total inflows in July of
IDR13.1t and the YTD inflows of IDR55.9t. Last week, the main support for the
market still came from the construction sector which is continuing to enjoy
strong interest on higher expected infrastructure spending by the next government.
Retailers also enjoyed renewed interest. Our view on this sector is positive
and we upgraded the sector rating to Overweight with BUY calls on ACES and
MAPI. On the flip side, CPO stocks remain under pressure, especially with
further weakness in the CPO price. The spot price has now drifted to
MYR2,150/tonne while the forward price for November 2014 delivery is even lower
at MYR2,090/tonne. While we see limited downside on CPO prices at this level,
there is still potential weakness in CPO stock prices since the equity market
does not look to have fully reflected the collapse in the price of the
underlying commodity itself.
2015 state budget: Subject to major revision
President
SBY gave his State of the Nation address on the draft state budget (RAPBN) of
2015, which is his last. Amidst the current transition, the draft state budget
does not provide clarity on key developments next year, especially in the
absence of fuel subsidy cuts, a crucial issue given that ballooning fuel
subsidies have weighed on the budget and dampened economic growth. All in all,
we see that the draft state budget of 2015 only projects a straight line
trajectory from the revised state budget of 2014, only taking into account
basic needs and public services. It is apparent that the current government
will leave the tough decision on fuel subsidy cuts to the next government. The
budget deficit to GDP ratio is still in the range of 2.32%. In our view, it is
difficult to see the 2015 budget as expansionary since subsidies still account
for a large chunk of expenditures. The potential revision of the state budget
by the next government could be major, especially with potential cuts in fuel
subsidies which would leave the government with more funds to allocate to more
productive segments. (Please refer to our report RAPBN 2015: The baseline for
the next government dated 18 August 2014 for more details.)
Constitutional Court verdict on 21 August
All
eyes will be on the Constitutional Court (MK) which will announce its final
verdict on 21 August, bringing to an end the presidential election dispute. In
our view, the MK will not declare Jokowi-JK’s victory invalid, although it is
possible that the MK calls for a reelection process in some provinces. However,
as the margin of Jokowi-JK’s victory was too large, any reelections would not
alter the final outcome in our view.
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