We are turning positive on the Indonesian equity market. We believe that Indonesia's key concerns are starting to dissipate, presenting an asymmetric upside opportunity for equity investors. In our view, much of the market’s apprehension stems from shortcomings in communication (e.g. Danantara concern, political uncertainty, and cabinet reshuffling), which do not accurately reflect the stance and direction of the country’s leadership. These concerns have exacerbated investor worries, which we believe are now at their peak. Over time, as these issues are clarified, we see an opportunity, given that the market appears to have priced in excessive negativity, and risk-reward is turning increasingly favourable.

The recent issues regarding revised military law have also given rise to some investor concerns, with the main concern being the likelihood of active military personnel sitting on the boards of SOEs. However, we note, according to article 47, active military personnel cannot sit on the boards of SOEs, but can only take positions in some government institutions (see Fig. 1). The article has been around since 2004 (except that its revised wording now includes the Attorney General’s Office).

Indeed, Indonesia’s market remains the worst performer among its peers (6M performance: JCI -19%, MSCI Indonesia -32%). However, unlike previous market downturns when Indonesia faced significant macroeconomic risks – such as a wide current account deficit, high inflation, and a fragile rupiah – the country’s macroeconomic position is now much stronger (see Fig. 6).

Asymmetric upside risks from policy communication and governance

In every political transition, there is typically a period of consolidation. During former president Jokowi’s first term, it took the market six months to bottom out, reflecting the time needed for political and administrative adjustments. We believe a similar pattern is unfolding in Indonesia currently. Two key developments could help restore investor confidence:

1) President Prabowo has agreed to meet with investors to address immediate concerns, which we believe could create a positive feedback loop for the government.

2) Indonesia’s Financial Services Authority (OJK) regulatory changes – The OJK has signed a regulation allowing stock buybacks without requiring a shareholder meeting (see here). This enables company owners to express confidence in their stock’s fundamentals and value, offering additional support for share prices (refer to our insider tracker report here and here)

High-beta, beaten-down, quality and liquid names likely to lead a rebound

For stock selection, we think high-beta, beaten-down, yet fundamentally strong and liquid stocks that previously suffered due to market concerns might lead a rebound should sentiment improve. We also couple this with a top-down approach, also taking into account the current economic backdrop and global developments, e.g. latest Fed assessment, and China consumer focus pivot. Stock picks fitting the above criteria range from defensives in health, consumer and retail (HEAL, ICBP, AMRT), banking (BMRI), and beaten down commodities (AADI, AKRA).

Fig. 2: Global indices' performance in the past 6 months – Indonesia market among the worst performers

Fig. 3: FX comparison – Indonesia is amongst the worst performers

Fig. 4: Foreign outflows from Indonesia – one of the fastest outflows per day

Fig. 5: Banks’ outflows – much of the inflows in the prior five years left in the past year. Total outflows reached IDR70tn (USD4.2bn)

Fig. 7: Debt to GDP comparison – Indonesia has amongst the lowest indebtedness

Fig. 8: Stock ownership by foreign investors – big caps. Big banks, and KLBF relatively got sold off. TLKM and BRIS are increasing

Fig. 9: Foreign to local ratio – BBCA, BMRI and BBRI are coming off but still at elevated levels. TLKM, ASII, BBNI, and BRIS are picking up

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

GENERAL DISCLOSURE/DISCLAIMER 
This report is prepared by PT Verdhana Sekuritas Indonesia (“PTVSI”) a securities company registered in Indonesia, supervised by Indonesia Financial Services Authority (OJK) and a member of the Indonesia Stock Exchange (IDX).

This report is intended for client of PTVSI only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of PTVSI.

The research set out in this report is based on information obtained from sources believed to be reliable, but PTVSI do not make any representation or warranty as to its accuracy, completeness or correctness. The information in this report is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. Any information, valuations, opinions, estimates, forecasts, ratings or targets herein constitutes a judgment as of the date of this report is published, and there is no assurance that future results or events will be consistent.

This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities or financial products. PTVSI and its associates, its directors, and/or its employees may from time to time have interests in the securities mentioned in this report or it may or will engage in any securities transaction or other capital market services for the company (companies) mentioned herein.

ANALYST CERTIFICATION
The research analyst primarily responsible for the content of this report and certifies that the views about the companies including their securities expressed in this report accurately reflect his/her personal views.  The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.

RESTRICTIONS ON DISTRIBUTION

By accepting this report, the recipient hereof represents and warrants that you are entitled to receive such report in accordance with the restrictions and agrees to be bound by the limitations contained herein. Neither this report nor any copy hereof may be distributed except in compliance with applicable Indonesian capital market laws and regulations. 

Jupriadi Tan (jupriadi.tan@verdhana.id)

Gerald Hugo (gerald.hugo@verdhana.id)

David Tjahjadi (david.tjahjadi@verdhana.id)

Felix Justin (felix.justin@verdhana.id)