Morgan Stanley Research

ASEAN Equity Strategy
Indonesia: The Case for Outperformance; Going OW
Relase date: October 31, 2018 10:05 PM GMT

Equities look set to outperform: NTM EPS growth bottoms 1Q19e with improving loan demand; residual earnings risk is priced in while consensus has cut its macro outlook along with proactive policy responses; and slowing cost of capital rises, plus a peaking CAD should perk up some foreign interest.

Upgrade to overweight; our index target implies 7% upside in an upside-starved equities world: Indonesia underperformed AxJ by 23ppt through May, but has since outperformed as policy makers responded and moved ahead of the curve. As well, while global macro remains uncertain, we see room for further outperformance.

  • Residual 6-7% earnings risk from macro tightening is in the price.
  • NTM earnings growth will inflect upward in 1Q19e, accelerating to a 2019e exit run rate of 14%.
  • Real rate differentials against the US are now 440bp; even if we adjust for “depressed” inflation due to its energy price caps, we still expect ~250bp.
  • A 100bp steeper yield curve from a sharp rise in risk-free rates is (arguably) already factoring in the risk of more rate hikes for equities.
  • A current account deficit peak in 3Q18 (MSe: US$9.4-10.8bn) is good for the balance of payments (a driver of equities) in the future.

2018 has not gone according to plan, but it’s not all bad news:

A strong US dollar has forced bigger and earlier domestic rate hikes in 2018 (150bp so far); high oil prices have added to the problem. That said, we see four positive takeaways from 2018 for Indonesian equities: 1) proactiveness of policy makers; 2) timely cuts to consensus macro expectations; 3) some consumer green shoots and improved loan growth; and 4) foreigners have already de-risked with US$7.7bn of equity since June 2017, 11 months ahead of broader EM outflows.

Where could we be wrong?

For geopolitics, polling currently favors the incumbent, President Widodo, which should ease any potential market concerns over continuity risk. A deterioration in the geopolitical landscape as campaigning heats up could lead us to revisit our outlook. A further steepening of the yield curve if risk free rates rise faster than expected could move us towards our 12x

bear case target P/E.

Which stocks to own?
We identify four large-cap OWs from our analyst teams:
TLKM, BBCA, ASII and BMRI. Mid-cap OW include: PGAS, EXCL, PWON and MAPI.

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