ASEAN Strategy Indonesia - at an inflection point - Daiwa Capital

Summary

 With inflation on the decline, investors who have been concerned about the possibility of runaway inflation should consider raising their exposure to the market. Value is emerging as well, in our view, with the market trading currently at a 12-month forward PER of 12.8x, based on the IBES-consensus forecasts. Our recent visit to Indonesia also suggests that mid- to high-end household consumption and corporate investment remain robust, unaffected by the recent monetary tightening.

 On a six-month horizon, we have increased our weighting on consumer discretionary (Overweight) and telecoms (to Neutral from Underweight) and reduced our Overweight position on the energy sector, as we believe Bank Indonesia is likely to place greater emphasis on Rupiah appreciation to cap inflationary pressures, rather than relying on policyrate hikes.

 We have also reduced our allocation to consumer staples (from Neutral to Underweight), as we believe that consumption at the low end is being driven partly by overseas-worker remittances, which could be affected by the unrest in the Middle East and North Africa (MENA). That region accounts for 60% of Indonesia ’s overseas workers.