GEM Equity Strategy: Is Indonesia’s Inflation Going the Way of India? - Credit Suisse

Of all the reasons cited, valuation is the key reason for the downgrade, in my opinion, which is temporary. We reiterate that Indonesia remains are the best structural ROE story within GEM and the fundamentals of the country remain solid. We agree that August could be the last month for us to see tame headline inflation, but then again the bet would be on core inflation breaching 5% for us to see potential 75bps policy rate hike in 4Q11. While India has its own problems, 0.7% over ownership in Indonesia is not a pressing concern, we believe.

· Strategist Sakthi Siva downgrades Indonesia from Overweight to UNDERWEIGHT on: 1) valuations (47% premium to GEM, highest ever); 2) MoM inflation pick up; and 3)”crowdedness.”
· Indonesia MoM CPI rises by 0.6%/0.7% in June/July. Despite the volatility in the MoM data, Sakthi believes it is a more accurate reflection of underlying inflation trends.
· Note that Indonesia’s YoY inflation has persistently decelerated to 4.6% in July (vs 7.2% in February). Sakthi, however, cautions that the favorable base effect for Indonesia’s YoY inflation would be the last one in August.
· YTD net foreign buying in Indonesia is US$2.66 bn (77% of total net foreign buying in Emerging Asia ex-China of US$3.47 bn), vs Indonesia’s MSCI weighting of 7% in Emerging Asia ex-China. For 2011 YTD, Indonesia has seen more net foreign buying than India’s US$2.32 bn.