Indo Strategy 240212, Taking a breather for now, CLSA

Early on in 2012 Indonesia finds itself in the unusual position as a laggard
to regional indices. While some of this underperformance is rotational, a
number of regulatory overhangs, a polarising central bank and renewed
inflation risk has weighed on the index and provided an excuse for profittaking.
Yet the renaissance in investment and FDI continues unabated.
We recommend being overweight the ‘supply side’ of the Indonesian
economy: cement, property/industrial land and infrastructure.

A slow start to the year
 Early on in 2012 Indo finds itself in the unusual laggard position to regional indices.
 Rotation to last-year’s underperformers and a rally in risk assets has seen the
‘defensive paradox’ thesis play out on the other side in beta market conditions.
 A number of regulatory overhangs, a polarising central bank and renewed inflation
risk have provided a profit-taking excuse for investors.
Regulatory uncertainty driving profit taking
 Regulatory concerns across a number of sectors of the economy have been
somewhat of an overhang and provided an excuse for profit-taking by investors.
 Greatest concern has been in the banking sector on BI’s aim to lower lending rates.
 Our discussions reveal the aim here is not on compressing NIM’s or profitability but
rather the effective translation of monetary policy.
 Ambiguity on policies surrounding fuel subsidies, minimum wages, automotive
downpayments & a potential ban on mineral exports have added to the uncertainty.
Inflation risks have heightened and BI has polarised
 BI’s aggressive monetary easing cycle has polarised investors in that it may have
been a case of too much too soon.
 While inflation risk does exist with the core remaining stubbornly high and oil prices
continuing to rise, we believe it is manageable.
 IDR is al pressure point for domestic confidence and limiting inflationary pressures.
Investment renaissance – BUY the ‘Supply Side’
 After years of underinvestment the renaissance in investment and FDI continues.
Momentum on the land-bill serves as a further catalyst to this thematic.
 Cement, property/industrial land, infrastructure & media are key ways to play this.
 We are tactically neutral banks at this juncture given regulatory pressures and
material outperformance in 2011.
 Consumer confidence is very strong & we expect a strong 4Q11 reporting season.

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