The JCI has declined by 11% over the past three months, owing to market concerns about consumers’ weak purchasing power, uncertainity around policy communication, and rising US trade tensions (refer to our previous reports here and here). An emerging event risk factor comes from the potential cabinet reshuffle, as mentioned by President Prabowo. While there has been no confirmation, our scenario analysis suggests that current market conditions pose asymmetric downside risks.

Our study, covering the period from 2010 to 2022 and past government changes post-elections, shows that, on average, the market declined by 2% within seven trading days (-7%/-11% in 2014/2010) after a reshuffle announcement before rebounding. Conversely, in the absence of a reshuffle, we see limited immediate upside catalysts for the market.

As a result, we recommend investors de-risk their portfolios and seek shelter in stocks that have limited foreign selling exposure (derived from investor-local ownership ratio), limited overweight from local investors, and liquid stocks.

Elevated market uncertainty and limited near-term upside risks

Our discussions with market participants highlight multiple factors contributing to the recent sell-off in the market such as weak purchasing power (as evident in the weak VMMI, a sharp decline in auto sales, sluggish cement sales, declining individual deposits, etc). Additionally, market sentiment remains cautious due to concerns about potential government budget cuts, which could further weigh on domestic growth prospects. While the specifics of further budget cuts remain uncertain, we believe the overall impact on economic growth should be limited, given that government final expenditure accounts for only 7% of Indonesia’s GDP (vs the global average of 17%).

Portfolio strategy – positioning in under-owned and liquid stocks

Given the asymmetric downside risks to the market, lukewarm foreign investor sentiment, and relatively low cash position among local investors (see Fig. 9), we recommend positioning in stocks that : 1) offer low foreign exposure (derived from <2.0% foreign portfolio weighting and <2.0x foreign-to-local ownership ratio); 2) are under-owned by local investors (derived from consolidated max overweight at 0.25% of portfolio), and 3) are liquid names (ADTV six months of above USD1.5mn). Our shelter picks include SRTG, HEAL, ACES, AKRA, and ADRO.

Fig. 1: Summary of JCI performance during past cabinet reshuffling – potential knee-jerk

Fig. 2: Shelter picks – low foreign to local ownership, under-owned by local investors, liquid names of >USD1.5mn ADTV 6M

Fig. 3: Significant foreign outflow given domestic uncertainty

Fig. 4: Current outflow cycle is one of the fastest since 2010

Fig. 5: Weekly foreign flow chart – BBRI first, then BMRI, now BBCA

Fig. 6: IDX80 stocks foreign/local ownership ratio, OW/(UW) to IDX80, and liquidity

Fig. 7: Government final expenditure contribution to Indonesia’s GDP

Fig. 8: Global government final expenditure as % GDP – Indonesia at one of the lowest

Fig. 9: Industry cash levels on a declining trend

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. 

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ANALYST CERTIFICATION
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Jupriadi Tan (jupriadi.tan@verdhana.id)

Gerald Hugo (gerald.hugp@verdhana.id)