Indonesia Strategy - Unwavering Conviction

Panic-stricken market
We are confident that the real economy will not be derailed by the downturn in capital markets. Still, we expect a “panic-stricken” market to ignore fundamentals, whilst fear-mongering likely becomes prevalent to justify the decline. Fundamentally, it is tempting to buy, but sentiment-wise the market is still exposed to weakness and rotational selling of outperformers. In the event we have misjudged sentiment, the following stocks are appealing: ASII, BMRI, BBNI, INDF, INTP, UNTR and PGAS.

Fundamental buyers of the market
1. The rupiah is strong, thanks to FDI inflows, 2. The ‘triple surge growth trajectory is structural in nature, and 3. Indonesia is one of the cheapest growth stories. Indonesia’s growth trajectory lies in the broad-based surge in investment as the country breaks away from its 'lost decade; we think this is unlikely to be derailed
by disruption in capital markets. The market needs to weigh up the certainty of such growth vis a vis its valuation, rather than on valuation alone. We believe Indonesia is still one of the cheapest growth stories (PEG basis-Figs.1&2). An historical valuation comparison is less meaningful as it depicts Indonesia during its 'lost decade' vs. the current vibrant economy.

Sturdier confidence - real economy
Not easily dissuaded: For a largely domestically-driven economy, confidence is the main link between external events and the economy. Surveys by BBC and Nielsen (May 2011) place Indonesia in the No.1 position for entrepreneurs and as the 3rd most confident consumer amongst surveyed countries. Such results don’t suggest fragile confidence. Indonesia's resilience during the 2008-09 global financial crisis further emboldens business confidence amidst a volatile operating environment. Not easily swayed: Based on our extensive interactions with many real sector investors, we find that they take a multi-year view and are even willing to put up with 'inconveniences' to ensure a presence in a country with compelling structural
growth prospects, amidst prolonged weakness in developed economies. This stance is not easily swayed by changeable capital market sentiment. Rupiah conviction: We attribute IDR weakness to BI’s intervention strategy rather than its ability to ensure stability. Further volatility is possible as we only expect more aggressive intervention when the dust settles. As noted before (Safety or Growth/14 Sept), FX reserve increases over the past 3 years that doubled portfolio inflows, support BI's ability to defend the rupiah (Figs 5&6). Strong FDI, reflects the rupiah’s underlying strength. (page 1 only)

Source: Deutsche Bank AG/Hong Kong dated 23 September 2011