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While
we are still cautious on Indonesia’s short-term equity market
outlook
owing to economic and political uncertainties, we are of the view that its
long-term fundamentals are intact. We foresee 2014 GDP growth dipping to 5.4%
while Bank Indonesia (BI) may have to raise the BI rate to 7.75-8.25%. As
short-term macroeconomic fundamentals are weak, bottom-up is the key to finding
alpha in the market.
¨
Bracing
for challenging times.
Indonesia closed 2013 in a very different situation from what it faced in the
first semester. Several macroeconomic imbalance episodes have resulted in
contraction and the reversal of many economic indicators as at end-2013. Fears
over US quantitative easing (QE) tapering and the worsening current account
balance were the main culprits of the high volatility, especially the IDR’s
depreciation. In the years ahead, Indonesia will face headwinds to economic
growth as the Government’s policies are geared towards creating a stable –
rather than an expansionary – economy.
¨
Economic
slowdown.
We foresee 2014 GDP growth moderating at 5.4%. The headwinds will likely come
from foreign trade and investment, although there will be some cushioning from
private and Government consumption on the back of the General Election next
year. Meanwhile, the 2014 outlook is for inflation of a low of 6.2% y-o-y.
However, the IDR’s depreciation could pressure domestic prices, especially for
goods that have high import content. We predict that the exchange rate will
decline to the IDR11,000-11,500 per USD range and expect the BI rate to increase
to the 7.75-8.25% range in 2014.
¨
Changing
political landscape.
Indonesia is in waiting for the next election to see who will emerge as the
country’s new leader. Uncertainties remain high, as the most popular candidate,
Joko Widodo (popularly known as Jokowi), has not even been nominated. We believe
Jokowi’s nomination will create positive market sentiment as political
uncertainties fade. Despite the possibility of coalitions being formed among the
political parties, the bargaining position of any new leader will be high given
that the current voter sentiment is towards voting for a candidate irrespective
of his party background.
¨
Looking
beyond 2014.
Although the Indonesian market is facing high volatility and potentially more
capital outflow, we believe the long-term outlook still remains intact. The weak
IDR, high interest rate, and wage increase will be reflected in 2014’s results
while a slowdown in demand may affect overall performance in the new year.
Hence, we suggest that investors look beyond 2014 with a bottom-up approach. We
like companies that tap into the low income segment that should benefit from
government policies going forward. Our picks are Astra Agro Lestari (AALI IJ,
BUY, TP: IDR28,350), Arwana Citra Mulia (ARNA IJ, BUY, TP: IDR930), Bank Rakyat
Indonesia Persero (BBRI IJ, BUY, TP: IDR10,100), Bumi Serpong Damai (BSDE IJ,
BUY, TP: IDR2,400), Gudang Garam (GGRM IJ, BUY, TP: IDR46,500), Malindo
Feedmill (MAIN IJ, BUY, TP: IDR4,000), Ramayana Lestari Sentosa (RALS IJ, BUY,
TP: IDR1,650), Semen Indonesia (SMGR IJ, BUY, TP: IDR17,000), Tiphone Mobile
Indonesia (TELE IJ, BUY, TP: IDR900) and Telekomunikasi Indonesia (TLKM IJ, BUY,
TP: IDR IDR2,500).
Best
regards,
RHB
OSK Indonesia Research Institute
dated 19 December 2013
