Indonesia Strategy:Economy over politics

Conclusion

The Jakarta governor election will be held on 15 Feb. Despite a recovery inincumbent Ahok’s popularity, polls indicate no candidate is likely to win in oneround, with a 2nd round expected around mid-April. We would use anyweakness in the market owing to concerns on the election as an opportunityto accumulate stocks in our ‘domestic quality cyclical’ model portfolio.

A cyclical upswing in Indonesia’s economy driven by rapidly improved termsof trade is the key reason why we are constructive on the JCI (FY17 year-endtarget 5,700). We are already witnessing a big upswing in Indonesia’s exports(+14% y/y in Dec-16) and we expect this to continue during at least 1H17. Ourmodel portfolio is comprised of domestic quality cyclicals: banks, retail,property as well as tactically overweight commodities.

Impact

Political concerns over Jakarta election builds. During marketing in Asia inDec 2016 we noted a general lack of concern for the Jakarta Gubernatorialelection. The tone has changed decidedly early in the new year with manyinvestors now citing political issues as a key concern for the market. Thoughshort-term volatility may hit during 1Q17, we examine in this note why themixing of religion and politics is nothing new in Indonesia and will probablyremain so in the future.

Commodity prices remain supportive of an economic recovery. A cyclicaluptick in Indonesia’s GDP from commodity export strength is a key reason tobe invested, in our view. Whilst Jakarta is indeed important economically (c.

20% of GDP) and as the political centre of the country, activity in the regionsduring 1H17 will be key for GDP to pick-up to our forecast 5.2% in FY17e. Weexpect positive momentum in exports which, all else equal, should also beIDR positive for our key near-term economic drivers.

Outlook

We remain constructive on the market due to the expected positive impacts ofstronger commodity prices on GDP growth. Our model portfolio contains thefollowing stocks: BBRI, BBCA, SCMA, ACES, MAPI, BSDE, CTRA, ADRO,UNTR, INCO, and EXCL.

All stocks in the portfolio except for ACES and INCO have contributedpositively to returns, with the overweight in banks (BBRI, BBCA) drivingoutperformance vs the benchmark.

We recently upgraded ACES to our preferred retailer and stick with thatposition. INCO has been under pressure following a recent decision by theIndonesian government to relax unprocessed ore exports (-34% sinceinclusion in our portfolio). Our commodities team expects a pick-up instainless steel demand and a close to balanced market in nickel for FY17e.