Strategy:
Currency Woes Dampen Sentiment
Currency Woes Dampen Sentiment
Sharp correction in JCI (down 4% on Friday) was mainly
triggered by precipitous IDR weakening on external factors, while domestic
macro improvements remain on track. We believe fundamentals still point to a
resilient IDR, especially given Indonesia’s relatively high levels of growth
among major EM economies. Consumer, pharmaceutical, poultry and high-end
retailers would be at risk of IDR weakening, while commodities and heavy
equipment players tend to benefit. High dividend yield stocks also offer
protection in the current volatile market. Maintain LT positive view.
♦ Currency volatility
is back on. Fears over potential Federal Reserve (Fed) rate hike
resulted in IDR falling by up to 3% to IDR13,545/USD on Friday.
Considerable IDR weakening could lead to higher production costs and potential
cost overruns in certain infrastructure projects, which would lead to higher
inflation and growth risks. Strong foreign fund inflows have also increased
risks.
♦ Indonesia is still on
track for macro improvement, in our view particularly with its rising forex reserve
of USD115bn and potential influx of repatriated funds by end-2016. However, the
weakening IDR is seen as the main spectre for investors and its occurrence
could trigger a market melt-down due to panic selling, shifting focus away from
real fundamentals. Thus, BI’s firm response and action would be critical in
restoring stability and confidence, in our view. We opine that IDR volatility
would still linger before it recovers to IDR13,200/USD by end-2016.
♦ Stronger fundamentals
now. There
have been several episodes of high IDR volatility, with the last one occurring
during 2014-15, when IDR depreciated as much as 30% and JCI suffered 13%
losses. In our view, the current situation is different especially given the
positive macro environment, in contrast to the subdued economic situation
during 2014-15, on BI’s tightening rate policy bias.
♦ BI is already in the
market to
stabilise the currency given considerable depreciation in IDR, and we view this
intervention as plausible to show direction. Current account deficit also
remains manageable at 2.1% in 9M16 (3Q16: 1.8%) vs peak of 4.3% in 2014. We
expect IDR to weaken slightly to 13,600/USD by 3Q17 on the back of larger
current account deficit and potential Fed rate hike.
♦ Resilient IDR. In summary, we opine
that fundamentals point to a resilient IDR, underpinned by high yield
differentials vs developed market (DM) economies and peers, relatively high
levels of growth among major emerging market (EM) economies, and ongoing reforms.
Domestic consumption and government-led infrastructure spending also continue
to serve as supporting factors for economic growth improvements and we still
expect the economy to grow at 5.3% in 2017.
♦ Impact of weakening
IDR. IDR
weakening would impact corporate earnings through operational currency mismatch
and/or forex debt translation. Consumer, pharmaceutical, poultry and high-end
retailers have high importation costs and would be at risk. Conversely,
exporters such as commodities and heavy equipment players would tend to
benefit. Companies with high USD debt would also be negatively impacted if IDR
weakening continues.
♦ All in, commodities
and high dividend yield stocks offer some shield, in our view. We
like London Sumatra and United Tractors as commodity plays, while Indocement
Tunggal and Hexindo Adiperkasa offer highest dividend yields. Stocks with
strong fundamentals for potential bottom-fishing include Bank Negara Indonesia,
Astra International, Ciputra Development, Bumi Serpong Damai, Telekomunikasi
Indonesia, Indofood Sukses Makmur and Waskita Karya
Helmy Kristanto
Director
Head of Indonesia
Research
PT. RHB Securities
Indonesia
