Second sharpest monthly decline
Indonesian equities were under severe selling pressure in Nov-19 because of worries over slowdown in the economy, earnings disappointment and continued net foreign outflow as well as unexpected redemptions of some local mutual-fund products. MSCI also rebalanced the weight and stocks in their standard indices in Nov-19 by raising 5% Foreign Inclusion Factor (FIF) weight for China which we believe further led to foreign investors paring their holding of Indonesia stocks. The benchmark index JCI was down by 3.5% to 6,012 in Nov-19, the sharpest monthly decline after sharp correction witnessed during trade war turbulence in May-19 of 3.8%. Indonesia has seen continued foreign net outflow of USD2.2 bn since mid-July, but still posted net buy of USD2.9 mn year-to-date supported by the USD3.5 bn transaction value of MUFG bank acquisition at BDMN and BBNP. Global funds would have yanked more than USD600 mn from Indonesian stocks if we exclude BDMN and BBNP acquisition transaction.
Will the stock market rally into the year-end?
Indonesia stock market is more likely to rise in December according to analysis of one decade of data. Since 2009, historical statistics have shown that the JCI has rallied in December of the year in about 100% of the time. To get a sense of JCI returns in December, we have looked at historical data since Dec-09. History shows that the JCI has gained in 10 out of 10 years. Further, the index has gained 3.1% (on an average) with lowest return of 0.4% in 2013 and highest return of 6.8% in 2017. Based on the above back-testing, the expected return of JCI for the upcoming Dec-19 is 0.4%-6.8%, which corresponds to 6,035-6,420 levels and poses downside risk to our year-end 2019 target of 6,560. We expect i) renewed hope for the phase one trade deal between US and China to realize , ii) the completion of MSCI rebalance for November 2019, and iii) better market outlook for 2020 would provide support for a market recovery toward year-end.
So what stocks should we consider buying during this rally?
Following historical track record, based on the past 10 years since Dec-2009, SMGR and ASII achieved 90% of the time positive performance with average returns of 6.0% and 4.6%, respectively. Other stocks on the list that have closed higher in 80% of the time were INDF with 4.8% average return followed by UNTR (4.5%), SCMA (4.4%), BMRI (4.3%), BBCA (3.4%), BBNI (3.3%) and BBRI (3.2%) (Please refer to exhibit 1 on the next page). Looking at the return over the past 5 years, we see something different on stocks return, despite almost similar JCI return of 3.3% vs. 10 years of 3.1%. During this period, we found 9 stocks that have closed higher in 100% of the time which includes BDMN (15.2% return), WSKT (11.4%), SSMS (8.9%), BBNI (7.7%), BBRI (5.7%), JSMR (5.7%), INDF (5.7%), TLKM (4.3%) and PGAS (3.5%). The double digit average return on BDMN was lifted by 38.3% gain in Dec-17 when OJK was about to approve MUFG plan to acquire the bank. While on WSKT return, it was supported by 40.6% return in Dec-14 due to re-rating construction sector on Jokowi effect. Meanwhile, another following 10 stocks posting positive return of 80% of the time in the period (average return ranging between 3.1%-6.7%) were: ICBP, SCMA, SSIA, LPPF, BMRI, BBCA, BBTN, UNVR, KAEF and ASII (see also exhibit 2 on the next page).
Fundamentals are still positive, attractive valuation
Indonesia is the third worst-performing stock market (-3.0% Ytd and -1.1% in USD) in Asia after Korea of -8.2% and Malaysia of -2.8%. As it is getting cheaper by the day, we believe that is enough to lure investors back. We also witness many foreign houses remains overweight on Indonesia equities in their tactical asset allocation in Asia. Market valuation have turned attractive (forward PER of 13.9x) and seemed to retest previous 2015 GFC low of 13.8x, where we can be reasonably confident equity markets will recover over a 6-12 month view (exhibit 3). We maintain our positive view for Indonesia equity market in 2020 as i) better macro conditions (higher GDP growth , narrowing CAD, falling rates, and strengthening of Rupiah), ii) a higher earnings growth coupled, iii) current underperformance to regional peers and iv) light foreign investor positioning will together support our convictions to positive market outlook in 2020. Please refer to our 2020 equity market outlook report for more detailed information.