Indonesia Strategy, Tumpeng Rice Effects
The recent political development inside PDIP which led to the speculation that the party will endorse Jokowi as a presidential candidate is premature, in our view. But we believe Jokowi nomination will lower political uncertainties and positive for the financial markets. November 13 trade data also showed that fundamental economy of Indonesia is improving. Large cap will benefit first from the rebound followed with small cap stocks.
Jokowi for president?
The recent political development inside PDIP which led to the speculation that the party will endorse Jokowi as a presidential candidate is premature, in our view. The news that during PDI-P’s 41st anniversary reception, Megawati handed the first slice of tumpeng (cone-shaped rice dish) to Jokowi and subsequently shook his hand was translated as a sign that Megawati would endorse Jokowi.
However we believe PDIP, at the end will have no choice but to nominate Jokowi’s presidential candidacy. We also note some rallies in Jakarta by Jokowi supporters expressing their support for Jokowi to run for the presidential election. We are of the view that Jokowi nomination will lower political uncertainties and positive for the financial markets.
Election is coming
Within the next three months, Indonesia will hold parliamentary election which will be followed by 15 political parties. While those parties may have to form a coallition, as they are barely reach 20% threshold to nominate presidential candidate, Jokowi endoresement by PDIP may eleviate the party electabiity in the election. Currently PDIP has received around 22% votes from latest polling by Kompas. The recent survey of public’s irritation to the political parties behaviors has increased dependency of political parties to strong figures such as Jokowi.
November 13 trade data showed some improvement
Indonesia recorded the highest trade surplus since March 2012 of USD777m in November 13. So far the first two month of 4Q2013 have resulted in trade surpluses, which would help the current account from going to further deficit. The oil & gas trade still in deficit trend due to price-inelastic oil import, however gas trade recorded higher surplus of USD1.5bn compared to previous month at USD1.3bn.
This indicates that LNG production problems that hit gas exports since July 13 has been solved. However, the movement on both exports and imports indicates smaller trade size that would impact the economic growth.
Limited rally is possible
Jokowi nomination will spark rally in the market, however, we view only limited rally due to valuation of JCI that is currently at 13.7x P/E (vs. 9.4s and 8.3x P/E in Jan 2004 and 2009, respectively). On the other hand, with IDR has depreciated by 23.1% y-o-y, foreign holding has reached 63% and the current account deficit problem is improving, we believe the risk return profile for JCI has started to become attractive. Hence, we recommend large cap such as BBRI, GGRM, BSDE, SMGR, TLKM followed by mid-small cap ARNA, MAIN. RALS, and TELE.
Highlights
Jokowi get a go?
Newspaper reported that Megawati Soekarnoputri has sent a signal that she might support the presidential candidacy of Jokowi. During the PDIP’s 41st anniversary reception Megawati surprisingly handed the first slice of tumpeng (cone-shaped rice dish) to Jokowi and subsequently shook his hand. This is viewed by many at the celebration as blessing from Megawati to Jokowi to bcome the party’s presidential candidate.
Jokowi’s nomination will ease the uncertainty
We think that the nomination of the PDI-P’s popular Jokowi will lower the uncertainty, as all the voting polls indicate that he will receive the highest number of votes should he be chosen to run for President. However, as at the date of this report, Jakarta’s Governor is not a Presidential candidate as yet, but we opine that his nomination will be announced before the Parliamentary election.
Parliamentary election
So far, only the PDIP and the Golkar Party have consistently led in the Top 2 positions in the polls. However, with parties barely able to get 20% of the votes – the threshold required for registering a Presidential and Vice Presidential candidate – we should see the formation of coalitions among the various political entities. What is different from the previous election is that the character of the President candidate will determine his/her victory, which should provide the country’s next President with a strong bargaining position in Parliament.
Limited election rallies
We expect limited election rallies in 2014 as the threat of capital outflow still lingers and the valuations of the JCI are still relatively high. The index is currently trading at a 13.7x forward P/E vs 9.4x FY05 P/E (early 2004) and 8.3x FY10 P/E (early 2009). In our opinion, the election rallies in 2004 and 2009 were driven by new expectations of the elected Governments, but valuations and global financial market liquidity were also key factors for the market performance post elections. Nevertheless, with foreign holding has dropped to around 63%, the risk of foreign outflow is limited.
First, we stick to our view that Indonesia’s long-term outlook is still intact. Furthermore, with IDR has depreciated by 23.1% at IDR11,860, the risk return profile has become more atractive as the downside limited especially with the improving trade data in October and November 13 and the foreign holding has reached 63%. At the same time, the recent development in politic has appointed to the high possibility, although still pre-matured that PDIP will endorse Jokowi as a presidential candidate.
Hence, we recommend large cap such as BBRI, GGRM, BSDE, SMGR, TLKM that will enjoy the first bacth of rebound followed by mid-small cap ARNA, MAIN. RALS, and TELE.
