Regional
Strategy: Stronger Malaysia Exports & Likely Indonesia Rate Cut
We
lift our end-2017 KLCI target to 1,790 pts due to improving macro-economic
conditions. The Indonesia market may see some action from a possible interest
rate cut in the next two months and the second round of the Jakarta election in
April. China’s economic data showed some positive signs, with the Caixin
Manufacturing PMI at 51.7% in February, higher than January’s 51%. We also see
the Shenzhen-Hong Kong Connect benefitting selective small-mid caps.
Singapore’s economic indicators have shown recent strength, and we are more
optimistic on Thailand’s 1Q17 outlook.
Indonesia
Strategy: Needs Accelerant
Confidence
remains in the doldrums, as seen in the continuation of the flattish market and
foreign outflow trends. We keep our expectations of a rate cut, with a limited
time frame up to April – mainly banking on a lower seasonal inflation period.
The second round of the Jakarta election in April is likely to keep political
tensions elevated. Economic recovery remains at gradual pace, with commodity
price improvements seen as the accelerant for growth. We add Bukit Asam, Mitra
and BTN to our Top Picks list, while removing BNI, United Tractors and Lonsum.
Astra, Indofood and Telkom remain as our top large-cap BUYs.
¨ To cut or maintain? We have been arguing
that there is room for one more rate cut this year to support economic growth,
especially after the weak 4Q16 GDP data. We believe the window for a rate cut
may be available until April. This is as inflation could remain low during this
period due to the harvest season, with a deflation situation possible –
especially in April. Having said that, and given the central bank’s inflation
target framework, this period of low inflation ought to provide rare
opportunity to put stimulants in place to propel growth. Beyond this timeframe,
preparations for the Ramadhan season and possibility of a US Federal
Reserve (US Fed) rate hike closer to 2H17 is likely to close the window for
further monetary easing, in our view.
¨ Still not out of the
woods.
We believe the 2-round election scenario has largely been anticipated by the
market, including the success of incumbent Mr Basuki Tjahaja Purnama (popularly
known as Ahok) going into the second round. A win for Mr Ahok would ensure the
continuity of the current reform-minded government and his win – should it
happen – would be perceived as market friendly. To win in the second round,
however, the incumbent would need to perform impeccably and continue executing
his policies in Jakarta. This is believed to be his main strength. Anything
less than that could result in an irrevocable loss of momentum prior to the
second round, which is to be held on 19 Apr. Heightened political tension
remains the major risk concern, in our view, which could limit market performance
in the short term. However, we believe Indonesia can still offer a value
proposition on a long-term basis, driven by a lower interest rate environment
and reform-oriented government stimulus policies. Additionally, infrastructure
projects would continue to go ahead, in our view, irrespective of whoever wins
in the Jakarta election.
¨ Improvements in government debt management. With government
infrastructure spending as one of the economy’s growth drivers, the timeliness
of budget spending would be critical. Based on recent data, government spending
has reached IDR168tn (8.1% of the total budget) as at 20 Feb. While the
achievement was down from last year’s IDR189trn, the lower absorption does not
signal a deterioration of execution capabilities, in our view. Rather, it is
due to a more normalised tender process for the 2017 budget. On revenue side,
the situation looks to be improving, partly helped by stronger commodity
exports, with overall revenue up to IDR145trn. To finance the country’s state budget
deficit, the Government is to continue issuing bonds. However, we note that the
Government’s current stance on improving debt management efficiency by only
offering market yields. The recent SR-009 retail sukuk only offers a
6.9% coupon yield, ie considerably lower vis-à-vis the 8.3% yield of the
previous SR-008. While this would improve the Government’s prudent stance, it
might risk the achievement of a net government bond issuance target of
IDR400trn this year. It could also potentially lead to a higher deficit level
or reduction in non-priority spending. We believe the Government is likely to
opt for the latter.
Link
to Regional strategy report: REG Monthly Compass_20170302
Link to Indonesia strategy report: Indonesia Strategy: Needs Accelerant
Best regards,
Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia
Link to Indonesia strategy report: Indonesia Strategy: Needs Accelerant
Best regards,
Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia
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