Indonesia Strategy, Still Like Supply Side, CLSA

Emerging markets have struggled in May and Indonesia has
underperformed relatively. One key reason is IDR pressure. A confluence
of aggressive monetary policy, BI’s late moves to intervene and
heightened “policy risk” has made the IDR (a confidence barometer)
vulnerable. Against a volatile backdrop we maintain our strategy of
BUYing the ‘Supply Side’ of Indonesia’s economy given high earnings
visibility & domestic business models less exposed to the global malaise.


Currency the culprit
 While emerging markets have struggled in May, Indonesia’s relative
underperformance has been notable.
 We believe one of the key factors has been volatility and pressure on the IDR.
 BI’s conference call last week and efforts to stabilize the IDR via intervention has
calmed down fears but nevertheless investors remain jittery.
 A strong/stable IDR is critical for maintaining confidence in Indonesian assets.

Illiquidity magnifies movements
 Asset movements are magnified in Indonesia due its relatively illiquidity.
 With investors looking to pare risk aggressively this has seen some dramatic swings
on the currency and index as “volatility” has increased.
 A rate increase or further tightening in the overnight deposit rates (Fasbi) at the
June 12 central bank meeting would go a long way to help shore-up the currency.

“Policy Risk” has not helped
 The investment renaissance has been one of the key drivers of the Indonesian
success story.
 However increasing “policy risk” in a number of sectors threatens to be a deterrent.
 While not “new” news, the nationalistic sentiment couldn’t come at a worse time as
Indonesia moves to a current account deficit & given the broad market weakness.

Overweight the ‘Supply Side’ – greater earnings visibility
 Despite a dramatic sell-off in commodity stocks we would continue to underweight
the sector given an uncertain global outlook & no signs of debt monetization as yet.
 We maintain our strategy we have espoused since the start of the year of BUYing
the ‘Supply Side’ of Indonesia’s economy.
 These are stocks/sectors leveraged towards rising FDI, lower cost of capital,
infrastructure investment and the consumer’s propensity to ‘trade-up’.
 These are also stocks where earnings visibility is higher and with domestic business
models less exposed to the global malaise.

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