Regional
Outlook: FED-Up? Go For ConnectOr Amnesty
The
Fed rhetoric at Jackson Hole points to a higher likelihood of a rate hike this
year, and our base case is for one hike in December. For the HK market, we are
positive on strong sectors including property, telco and software – the
impending Shenzhen-HK Connect should benefit small & mid-cap stocks. The
Indonesian market should gain from macro recovery and tax amnesty, whilst BI
may loosen its monetary policy further. We recommend investors lockin profits
in the Malaysia and Thai markets.
Indonesia
Outlook: Inflow-Driven Market Re-Rating
The
equity market continues its re-rating, mainly driven by surge of inflow
amounting USD3bn YTD (2015: USD1.5bn outflow). We believe the tax amnesty is
only one part of the drivers, as the macroeconomic environment has also started
to show more pronounced recovery and will have an equal merit in luring inflow
back to Indonesia. In 2017, we are expecting three main conditions to set in,
ie higher economic growth, stable inflation and a lower interest rate
environment.
¨
Strong
inflow is supporting the market.The market continues to enjoy foreign inflow
of USD3bn YTD. This has supported the market re-rating so far (market return of
22.7% YTD in USD terms). In our view, this inflow was not merely driven by the
euphoria of thetax amnesty programme, but also supported by an improvement in
the macroeconomic environment. We believe the latterwill become the core
investment fundamental in Indonesia, albeit gradually. Going forward, we
believe inflation will likely ease in 2H16 and provide room for Bank Indonesia
(BI) to loosen its monetary policy further. We expect another cut in the 7-day
reverse repo rate by 25bps, given that BI said there was still a need for
additional easing to stimulate growth. In 2017, we are expecting three main
conditions to set in, ie a higher economic growth (5.3%), lower inflation (3.8%
average) and lower policy rate (4.5%). As a consequence of better economic
activity, we expect the current account deficit (CAD) to go up to 2.5% in 2017,
but will still be manageable and well below the peak of 4.3% recorded in 2Q14.
¨
Stimulus
policy continues.The
Government has announced that it will cut out unnecessary processes involved in
building low-cost housing as part of the 13th stimulus package. Similar with
previous stimulus programmes that were mainly directed to streamline business
process, the Government is also cutting the number of permits developers need
to secure in order to build affordable housing for low-income earners to 11
from 33 previously. As such, there will be some cost savings as well as a
shorter permit processing period. As a continuation to the third stimulus
policy, the Industry Ministryis contemplating the addingof three more sectors
as beneficiaries of the reduction in gas price. There are currently six
sectorsthat benefit, ie fertiliser, petrochemical, oleochemical, steel,
ceramic, glass, and tyres/rubber gloves. The potential three new additionsare
pulp and paper, food & beverage (F&B), and textiles and footwear.
¨
Investors
are increasingly cautious on the valuations. During our recent overseas marketing
trip, most of the clients that we met shared our view on further improvements
in the macroeconomic environment, with a stronger IDR, stable inflation and
lower interest rate that will further support economic growth and corporate
earnings. On the other hand, the execution of the tax amnesty is now the
biggest concern, especially given the aggressive target. Nonetheless, clients
appear to have reserved some discount to the Government’s target and
IDR50-60trn is seen as a more realistic consensus view. The recent cabinet
changes arealso perceived to have strengthened the Government’s capabilities.
¨
Improvements
in the tax amnesty’s execution and potential Standard &Poor’s (S&P)
upgrade by year end could be seen as the next catalysts. Over the longer term,
potential corporate tax reductionswill support earnings growth in the medium to
longer term. In summary, we believe that investorsare still adoptinga
constructive view on Indonesia, although are increasingly more cautious on the
valuations level. Our TopPicks in the market are Astra International (Astra)
(ASII IJ), Bank Negara Indonesia (BBNI) (BBNI IJ), Telekomunikasi Indonesia
(Telkom) (TLKM IJ), Indofood Sukses Makmur (Indofood) (INDF IJ), Bumi Serpong
Damai (BSD) (BSDE IJ) and Waskita Karya(Waskita) (WSKT IJ).
Helmy Kristanto
Director
Head of Indonesia
Research
PT. RHB Securities
Indonesia
