Reversal Risk Amid Renewed Global Volatility

Macro Shifts Drive Foreign Inflows to JCI bringing near our bull case scenario of 7,200. The JCI rebounded 10.0% over the past 3 months (Table 9), supported by easing U.S.-China trade tensions and Bank Indonesia’s 25bps rate cut to 5.5%. Markets appear to have discounted Trump’s tariffs, allowing for foreign investors to return to the JCI as net buyers in May-25, recording equity inflows of IDR 5.9tn, with bond inflows staying strong at IDR 29.5tn. However, given the strong performance of our local market with the JCI as the top 3 regional performer behind KOSPI (+12.8%) and VNINDEX (+4.9%), foreign investors have turned net sellers in June amounting to IDR 2.9tn. Additionally, recent Israeli strike on Iranian military assets has escalated Middle East tensions, creating renewed risks. Brent crude has surged above USD 83/bbl, driven by fears of supply disruptions through the Strait of Hormuz, which could push US inflation higher. This may delay the Fed’s easing cycle or even trigger a hawkish pivot, strengthening USD and pressuring EM currencies like IDR. If these tensions persist, we could experience continued net selling by foreign investors in JCI, particularly since current index level is close to our bull-case scenario at 7,200 (Figure 1).

Sector rotation strategy to dollar earners and defensive stocks amid geopolitical risk. Given recent developments, we recommend investors to rotate into commodity-related sectors (dollar earners)—specifically oil-linked stocks like MEDC and AKRA, as well as safe-haven gold plays such as ANTM and BRMS. Additionally, we remain positive on the consumer sector, supported by the government's IDR 24.4 trillion (USD 1.5bn) stimulus package, the largest since the pandemic. This package targets low-income households through expanded social assistance, wage subsidies, and transportation-related discounts, signaling the government’s commitment to bolstering household purchasing power and sustaining consumption. With consumer staples tending to outperform during periods of macroeconomic softness, driven by resilient demand, companies like ICBP and AMRT should benefit from these trends. On a more negative note, the banking sector may continue to underperform the broader market on subdued 4M25 net profit up just +0.5% YoY, impacted by narrowing net interest margins, elevated operating costs (particularly at BMRI and BBRI), and ongoing liquidity tightness. While recent rate cuts may offer marginal relief, sector re-rating is likely to remain constrained by slower loan growth coupled with uncertainty in liquidity recovery and continued funds outflows.

Retain end-2025 JCI target at 6,900 for now on low JCI’s EPS growth of 0.8%. On the back of continued weak economic growth with recent downgrade by the World Bank to 4.7% (SSI: 4.8%), we maintain our fundamental base case scenario for JCI’s 2025F target at 6,900, particularly given the JCI’s low EPS growth at 0.8%, the lowest in the region (Figure 4). On valuation, our index target implies FY25 PE of 12x (regional average: 13.3x) and unattractive PEG of 15.0x (Regional average: 2.1x). Looking ahead, JCI’s outlook remains clouded by geopolitical risk, which could lead to hawkish shift by the Fed and pressure on USD/IDR. Domestically, institutional investors are expected to continue supporting the market, while foreign investors have turned into net-sellers due to their ongoing preference for government bonds. Thus, at this stage of the market cycle, our top defensive picks include BBCA, TLKM, ICBP, AMRT, and JPFA (Table 1), while our alpha picks are BKSL, SSMS, RAJA, WIFI, and DEWA (Table 2).