RHB Indonesia Morning Cuppa - 30 November 2016 - (Indonesia Strategy)

Good morning,

Indonesia Strategy: Managing Volatility

We opine that Indonesia’s fundamentals remain pointed towards long-term positives. This is underpinned by BI’s pro-growth policies to propel economic growth, the low inflation environment, continued government focus on infrastructure spending, and the security forces’ exemplary conduct in maintaining stability as political tensions rise. Thus, we expect stronger market direction post the Fed’s anticipated rate hike in December.

¨ Outflows dominate. Worries over a potential US Federal Reserve (Fed) rate increase and weakening IDR have triggered outflows in both the equities and fixed income markets. This is a reversal after months of inflows. Post Donald Trump’s win in the recent US elections, the JCI continues to trade at sub-5,200 level, with outflows recorded at IDR9.6tnin November. Similarly, outflows in the fixed income market have deepened, reaching IDR17trn over the past month, with the 10-year government bond continuing to escalate to 8.3% (August: +6.3%). Arguably, a lack of catalysts in the market have also led to the insipid performances, and we are only expecting stronger market direction post the Fed rate increase that is expected by mid-December.

¨ The three spectres are currency, interest rate trends and politics. As highlighted in our 14 Nov 2016 Currency Woes Dampen Sentiment report, the fundamentals still point towards a resilient IDR. This is underpinned by its high-yield differential vs developed market (DM) economies and peers, relatively high levels of growth among major emerging market (EM) economies, and ongoing reforms. Rising current account deficit (CAD) over the next few years is still manageable, while forex reserve levels also improved to USD115bn.

¨ Action by Bank Indonesia (BI) to intervene in the currency market is plausible to indicate direction. An influx of asset repatriation is also expected towards year-end, which would help the IDR to recuperate to a more favourable level. We opine that BI would maintain its current relaxation bias policy to propel economic growth, especially given the subdued inflationary outlook. As the series of rate cuts have yet to result in a meaningful economic trajectory, it is unlikely that the central bank would take the risk by reversing its current relaxation policy.

¨ Over the past five years, the spread between the BI rate and inflation has averaged 130bps vs the current 145bps spread. This provides room for further relaxation if needed. We expect BI to maintain its current benchmark rate until year-end, and potentially make another 25bps cut in early 2017 to further support economic growth under stable IDR circumstances.

¨ Jakarta Governor Basuki Tjahaja Purnama’s alleged religious defamation has raised the political landscape’s temperature, as seen by the magnitude of the anti-Basuki rally that occurred earlier this month. This upheaval is negatively perceived by investors, especially after >2 years of stable politics. The market is likely to take heed of the next rally and, more importantly, how the Government handles the situation. So far, the security forces have been exemplary in restoring stability. We continue to believe that the Government’s position remains strong. As long as these forces remain united under presidential control, any act that destabilises the country can be brought under control quickly.

¨ Commodity plays and blue chips. We like PP London Sumatra (Lonsum) and United Tractors as commodity plays. Bank Negara Indonesia (BBNI), Astra International, Ciputra Development, Bumi Serpong Damai (BSD), Telekomunikasi Indonesia (Telkom), Indofood Sukses Makmur and Waskita Karya are all stocks with strong fundamentals. (Helmy Kristanto)

Link to report: REG_Monthly_20161129

Link to Daily report: Indonesia Morning Cuppa 301116