Maintaining overweight Jakarta on elections; Stable Asian currencies
Joanne Goh, Philip Wee18 Apr 2019
    Photo credit: AFP Photo

    Equities: Re-rating JCI post-elections
    Early results suggest that incumbent President Jokowi may he headed for second five-year term after the Indonesian elections held on April 17. During his new term, we would expect stability and continuity in his polices, thus removing a major overhang for the market. Investors would know what to expect based on Jokowi’s track record in his first term. Infrastructure development will continue, with plans to focus more on the human resource development. Another emphasis is the distribution of wealth and the development of rural areas outside of Java. He also intends to continue with the bureaucratic reform and attract more investments into manufacturing to reduce dependency on resources and minerals.
    We believe investors’ reaction to the elections results will be positive. During his tenure, Indonesia obtained a sovereign ratings upgrade to investment grade, and steered through a mini emerging markets currency crisis in 2018 without much negative impact on growth as well as the financial system. Indeed the JCI has been re-rated during Jokowi’s term and further improvement is possible in our view.   
    We reiterate our Overweight on Indonesia, and raise our JCI target from 6500 to 6900 based on 16x 12-month forward PE. Sectors that would benefit during Jokowi’s new term would include infrastructure related sectors such as construction, toll roads and cement.  We are also positive on the industrial property sector, assuming Jokowi can boost investments and manufacturing. State-owned companies such as those in the energy and banking sectors would also continue to benefit from on-going reforms in these two sectors.

    FX: Emerging Asian currencies are still stable

    Barring unexpected shocks, it’s going to be quiet into the long Easter weekend. Overall, most Emerging Asian currencies have been nestled within their tight ranges of the past few months, even for Asian countries that held or are holding elections these few months. Since March, the Thai baht has not traded out of 31.4-32.0 while the Indian rupee kept to a 68.3-70.0 range. Neither was there a victory dance for the Indonesian rupiah (still in a 13900-14340 range since January 7) on early results favouring a second term for incumbent President Joko Widodo.

    The Malaysian ringgit, however, did transit into a weaker trading range of 4.10-4.15 this month after languishing within 4.05-4.10 since February. This week’s sell-off was triggered by FTSE Russell’s warning to drop Malaysia’s government debt from its global index. If so, this could lead to capital outflows. For now, the ringgit has given back the year’s appreciation and stabilized, especially after Prime Minister Mahathir warned of measures to shield the ringgit from speculative attacks.

    At the other end of spectrum, bullishness has returned to the Chinese yuan which strengthened past 6.70 for the first time since March 20. But the yuan may not break out of its two-month range between 6.67 and 6.75. While China’s GDP data did surprise on the upside, the fact that growth did not slow to 6.3% YoY in 1Q19 is not an argument for more yuan appreciation. Neither do we expect the Washington to pressure Beijing for a stronger yuan, now that America’s trade deficit with China has shrunk 9.2% YoY in January-February. Both countries are keen to finalize a trade deal that could come as late as the G20 Summit on June 28. The case for continued currency stability would be consistent with China’s growth holding at 6.4% for a second straight quarter. Moreover, the rest of the world is not doing as well. Singapore’s growth slowed to 1.3% YoY in 1Q19 from 1.9% in 4Q18, below its official 1.5-3.5% target for this year. The German government downgraded, for a second time this year, its 2019 growth forecast to 0.5% from its previous projection of 1% in January.


    Joanne Goh

    Regional Equity Strategist


    Philip Wee

    FX Strategist - G3 & Asia

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