Risk premium remains high

Rate hike pause helps relieve some pressure. JCI took severe hits over the past few weeks due to massive foreign outflow amid global uncertainties, most notably geopolitical risks in the Middle East, the Fed’s hawkish stance, high US Treasury yields, and subdued global economic growth. However, we believe the market has bottomed out, and the slowdown in US core inflation to 0.2% mom (Sep: & Cons: 0.3% mom) could bolster market confidence that the Fed is finished with its rate hike cycle. This, coupled with the Fed's rate hike pause at the beginning of the month, may provide emerging market investors with an early indication of risk-on sentiment, which may eventually spill over into emerging market assets. In the short term, JCI might benefit from several positive catalysts, including stronger consumption due to election spending, as well as various stimuli introduced by the government to maintain purchasing power and fight inflation; Rice Handout Program (IDR2.6tn) and El Nino cash aid for poor families (IDR 7.5tn). Our economist maintains a GDP growth forecast of 5.1% for 2023F, believing that the stimuli could act as a buffer against an economic slowdown in 4Q23.

 

Election overhang is finally waning. as Indonesia’s election commission (KPU) has announced the three candidate pairs who will run in next year’s presidential election. Anies Baswedan and Muhaimin Iskandar, Ganjar Pranowo and Mahfud MD, Prabowo Subianto and Gibran Rakabuming Raka. We believe this should help boost Indonesia's economic expansion and support foreign fund flows to return to the equity side, as we believe Indonesia might become one of the most popular emerging investment destinations in the future. In this report, we have summarized each candidate’s vision and programs (refer to Table 3).

 

JCI is still supported by domestic investors. Even though JCI experienced a quite massive foreign outflow of IDR 2.0tn MTD (YTD JCI inflow: IDR 700bn), it still rose 1.6% MTD, which indicates strong interest from domestic investors during the recent bond market rebound. We noticed that ASII, TLKM, and BBNI recorded the largest foreign outflow MTD. Amongst the big-4 banks, BMRI is the only one recording foreign inflow (IDR 52bn) MTD, supported by its strong 3Q23 results. Another thing worth highlighting is the fact that even after recording IDR 883bn capital outflow in Oct-23, selling pressure for GOTO remains relatively strong MTD (IDR 165.3bn outflow MTD). On the other hand, AMMN, MEDC, and AMRT booked the largest foreign inflow MTD.

 

Lower our end-2023 JCI target to 7,100 from 7,300. Our new fundamental base case scenario index target for 2023F, based on our earnings forecast, is 7,100 (prev: 7,300), as we lowered our P/E target to 13.7x due to increased equity risk premium. We continue to overweight election proxy sectors such as telecommunications, consumer staples, and banks, as we still believe these sectors could deliver robust growth in the upcoming quarters, supported by election campaigns (which should provide some boost for domestic consumption). We also favor the property sector, thanks to its attractive valuation (currently trades at 75% discount to NAV), and the property tax reduction stimulus (budget: IDR 3.2tn), which could help boost presales in 2024F. We added CTRA to our top picks due to its product mix (most of its products are priced below IDR 2bn) and solid presales outlook.