Credit Suisse Asia Equity Strategy - Indonesia drops out of the expensive four club

■ Indonesia drops out of the expensive four club. While we continue to Underweight the 2007 club (TIPs, India, Malaysia), Figure 1 highlights that Indonesia’s price-to-book versus ROE premium versus the region has dropped from a high of 40% on 31 October 2010 to 7% currently. It is now the fifth most overvalued market (after Shanghai, India, Malaysia and Hong Kong). And within Indonesia, three sectors have moved to a discount – industrials, telcos and consumer cyclicals. Additionally, Indonesia has been associated with net foreign selling YTD of US$427 mn versus net foreign buying of US$2.3 bn in 2010.

■ But 2011E consensus EPS revisions have turned negative. In our recently introduced GEM model portfolio (see our 6 January GEM Strategy report 2011 Outlook), we suggested zero exposure to Indonesia in a GEM context. Despite the move in valuations, our hesitation to upgrade Indonesia stems from the start of consensus EPS downgrades. For 2011E consensus

EPS, Indonesia is associated with downgrades in three of the last five months (see Figure 2) with Telcos, Energy and Materials seeing downgrades. We also note that Coal, Palm Oil and Consumer Staples still trade at high premiums of 61%, 25% and 17%, respectively.

■ We would prefer to upgrade Indonesia if it moves to a discount versus the region. We are likely to review our Indonesia weightings if Indonesia falls to a discount (currently 7% premium) within the region particularly if it becomes one of the four most undervalued countries.