Weekly Report - Slight market gains but on low volume

After undergoing a correction for a number of weeks, the JCI finally made a small 0.3% gain last week. Market liquidity was poor, however, with only IDR4.6t of transactions on average per day, an indication that the market gains owed to technical factors rather than an improvement in market confidence. In our view, the market’s recent correction has only priced in the unfavorable developments in the political sphere but has yet to reflect potentially higher 

interest rates. However, in the short-term at least, the inauguration of Jokowi and JK next week coupled with the announcement of the new cabinet formation could potentially provide the market with a fresh catalyst.

A slight rebound

After the significant correction in recent weeks, the JCI managed to eke out a slight gain, edging up 

0.3% last week, mostly driven by positive performance of stocks in the Property and Finance sectors. Within our coverage, MASA and TBIG were the best performers last week, up 25% and 11%, respectively. By contrast, commodity stocks were mostly in negative territory with BWPT, ITMG and HRUM down by 9 – 19% last week. Looking ahead, we believe that the inauguration of Jokowi & JK next week followed soon after by the announcement of the new cabinet formation will potentially provide the market with a much-needed catalyst. Whilst acknowledging that the strong standing of the opposition parties has been detrimental to overall market confidence recently, we are still hopeful that the announcement of a strong cabinet by Jokowi coupled with a bold and impactful 100 – days program will help act as a short-term panacea.

The largest market risks: macro volatility and a further crunch in systemic liquidity

While imminent fuel price hikes will be positive for Indonesia’s macro foundations in the longer run, inflation will be lifted in the near term, potentially prompting BI to hike interest rates. If this proves to be the case, the IDR may weaken further in the short to medium term, putting some pressure on corporate margins in addition to reducing foreign inflows. In our view, the market’s recent correction has only priced in the unfavorable developments in the political sphere but has yet to reflect potentially higher interest rates following likely fuel price hikes in November. For 2015, the biggest risk faced by the market is, in our view, inefficient budgetary spending following a reduction in fuel subsidies, since this would further depress systemic liquidity.

Net outflows continued, albeit less intense

Net outflows had intensified in recent weeks, peaking at IDR4.2t in the week of 29 September – 3 October, mainly driven by unfavorable political developments. Despite the market’s positive performance last week, foreign outflows still continued, albeit at a slower pace with weekly outflows of IDR1.1t. Market liquidity was poor with a MTD trading average of just IDR5.1t/day the lowest in 4 months. As last week’s trading only reached IDR4.6t/day, market gains seemed to owe to technical factors rather than an improvement in market confidence. In our view, the recent IDR weakness will continue to limit the potential of a reversal in foreign outflows. As such, we continue to argue that the largest catalyst for the market would be a calm and measured response by BI to higher inflation following the expected fuel price hikes.

We favor big cap defensive names and infrastructure plays

We prefer defensive names and infrastructure plays. In our view, telcos and big banks will continue to offer value over the longer term whilst higher spending on infrastructure by the new government will boost sentiment toward the construction and cement sectors. Our study on foreign ownership reveals that foreign ownership in BWPT, SMSM, WIKA, SSIA, SGRO, ADHI and WSKT increased by 5% in the period from August 2013 (the recent market low) to September 2014. Hence, if foreign outflows continue, the level of foreign ownership in these stocks could be affected in the short term. By contrast, foreign ownership in MSKY, BBTN, ASRI, PTBA, HRUM and ANTM fell by 1 – 15% in this period. As such, the risk of foreign outflows in these stocks appears to be less than for the former names. All in all, we remain positive on the market on a 12-month view as: 1. we believe that Jokowi possesses solid executional capabilities which would bring about more reforms and speediness in implementing government programs, 2. the macro outlook looks rosier, especially since lower fuel subsidies would alleviate long-term pressures on the state budget, ultimately paving the way for Indonesia’s rating to be lifted to investment grade and 3. overall macro improvements will help underpin strengthening of the currency, not only bolstering market confidence but also having a positive impact on corporates in the form of lower costs.