Indonesian equity market have recovered around 25% (48% in USD term) from March low to 4,921 at time of writing (Exh. 1), fuelled by liquidity and optimism over economic revival as global Covid-19 lockdowns ease. Global and domestic liquidity is flush supported by the macro outlook on the US dollar with USD index weakening by ~ 4% against global currencies since 22 May. The US dollar's bearish turn has opened the floodgates into emerging markets, helping currencies to get on board a rally so far driven by equities and bonds. The Indonesian Rupiah posted among the best performance of emerging-markets climbing more than 7% to 13,885/USD during that period. The benchmark equity index (JCI) is in bull territory from March to June while Indonesia government bond yields have corrected from this year high of 8.4% to 7.2% (Exh. 2). In Indonesia, foreign investors made a modest return by acquiring USD1.35 bn stocks and USD1.52 bn bonds in last three week, snapping the five month selling spree (Ehx. 3). We also see sustained retail domestic money flow into equity market have also helped to drive a stock market rally. Based on data from KSEI, retail investors holding rose by 6% to Rp816 tn in 5M20 vs. 25% JCI decline during that period (Exh. 4), implying rising participation in market.
… rather than fundamentally driven rally
With a likely steep fall in earnings estimates, we feel that it may be too early to assert that the equity market has discounted all negatives as i) the near-term uncertainties on GDP growth and earnings estimates remains extremely high and ii) the number of cases of Covid-19 has been escalating Indonesia to above 33,000 and daily cases hit the 1,000 mark. Based on the current macro developments and indicators, our economist revised expectation for the Indonesia economy this year. He now expects GDP growth to slow down to 1.7% in 2020, a downward revision from 2.5% growth previously. Corporate earnings woes are unlikely to end anytime soon as earnings, already hit in the 1Q20 by the Covid-19 pandemic initial containment measures, are set to weaken even further in 2Q20 on stricter social distancing measures (PSBB).
How long it can last
The flow or sentiment driven rally could last in near-term as Fed might still move with stimulus and we could witness further sector/stock rotation to support index. JCI may extend its liquidity-driven traction until end of June and could see the 5,200-mark, despite potential profit taking. Retails investors who have experienced profit are likely willing to take subsequent risks. However, we also view the current rally as a bear market rally, which are common in history. As an example, JCI experienced two distinct rallies ranging from 13%-20% in 2008 within an overall bear market (Exh. 5). We expect JCI to encounter another selling pressure in 3Q20, as the real extent of economic and corporate earnings impacts of Covid-19 become manifest with the release of 2Q20 earnings and GDP figure starting in July 2020.
We remain cautious on stock fundamentals
Our economy re-opening theme stocks idea (BBRI, BTPS, PGAS, PWON, SMRA, ASII) have enjoyed bumper gains of 20-38% over the past two week as investors show new support for economically sensitive companies. Yet, we believe Indonesian equities have run well ahead of fundamentals and investors should gradually book profits given the business operational has been badly disrupted by Covid-19 and recovery of these businesses will not be V-shaped. Following recent rally, JCI valuation re-rated to 14.2x forward PER (close to mean) which we believe is not justified by deteriorating outlook in earnings (Exh.6). We currently see 16.1% decline in 2020 earnings (post revision after 1Q20 results), in-line with the expected 16.8% drop in JCI to 5,240 at end of 2020. The continued pick-up in Covid-19 infections is a warning that a second wave due to social distancing easing should not be ruled out. We include ICBP (our analyst sees lagging performance while expecting earning accretive from Pinehill acquisition) into our portfolio replacing PGAS (we are reviewing our TP post recent rally). Other top picks remain BBRI, BTPS, UNVR, TBIG, TLKM, WIKA, MDKA (Exh. 7). Our portfolio rose 6.6% in May (outperforming JCI by 5.8%) as 6-32% gains in MDKA, BBRI, WIKA, SMGR and BTPS more than offset 9-12% losses in UNVR, TLKM and TBIG.