Head of Resrach Bahana Securities
On the back of Monday’s severe drop of 4% in the Jakarta Composite Index (JCI), bargain hunting had emerged in the past two days resulting in a cumulative 5% increase in Indonesia’s equity market. Such severe gyrations in market movements were caused by risk aversion on one side and bargain hunting on the other.
On the risk aversion front, we learned, in our recent marketing trips to Singapore and Hong Kong, that foreign investors were very much concerned about Indonesia’s IDR weakness and the country’s current account deficit.
In defense of Indonesia’s solid fundamentals, we had explained to foreigners that the country’s current account deficit is normal under weak external demand condition at present, as imports have been stable on high capital goods accumulation and strong raw materials requirement (exhibit 1) to support domestic demand, resulting in solid economic growth prospect.
This should encourage foreign portfolio investors to have their perceived risk on Indonesia remaining positive. That said, we believe once the dust settles, investors will continue to participate in "financing" Indonesia's relatively higher and sustainable growth, allowing for lower expected depreciation, or even a reversal towards expected appreciation, leading to greater attractive risk-adjusted return.
Unfortunately, often times negative sentiment and panic have the propensity to prevail over logic in times like the present when market anxiety is high. That said, the million dollar question
In our view, volatility will remain high and will take time for sustainable sentiment to return following the latest rounds of global equities meltdown until concrete measures are formed in the Euro zone. Nevertheless, we believe trading opportunities remain, providing investors with selective stock buying opportunities, particularly as market sentiment has improved following the central bank decision to support the local currency. This coupled with the recent announcement of USD-term deposit to further prop up the IDR, market performance should continue to be well supported.
In terms of stock picking, we advise investors to take shelter in domestic exposed safe havens, particularly as risk aversion continues to linger after signs of synchronized global economic weakness exacerbated concerns about the future of the euro zone.
On the flip side, while bargain hunting maybe hard to resist given the severity of price drops in commodity-related stocks, we continue to advise investors to stay away from exporters due to their exposure to the full-force of global economic vagaries.
That said, with bad news related to US manufacturers switching to gas from coal, we expect the performances of coal related plays to remain under pressure. This structural coal development in the US is likely to cap oil and CPO prices ahead. Thus, we UNDERWEIGHT all commodities.
At this stage of the cycle, we continue to recommend investors to remain defensive with our top 10 picks (exhibit 2) as follows: Telkom Indonesia (TLKM), Gudang Garam (GGRM), Perusahaan Gas Negara (PGAS), Kalbe Farma (KLBF), Jasa Marga (JSMR), Indofood Consumer Branded Products (ICBP), Garuda Indonesia (GIAA), Mitra Adiperkasa (MAPI), Wijaya Karya (WIKA) and Lippo Cikarang (LPCK).