Indonesian Equities Under Trumpnomics
    Category: Column By : Rainer Michael Preis Read : 665 Date : Tuesday, March 01, 2017 - 11:55:46

    The election of Donald John Trump as the 45th U.S. President has ushered in a new investment world for investors in Indonesia and worldwide. When fundamentals mattered, central bank quantitative easing and growth differentials used to move markets. Now fears of protectionism and concerns about a post-liberal world are becoming more real.

    Single stocks and even whole country stock markets can now move because of a tweet from the White House. The consensus view still forecasts a benign to positive outlook for U.S. and global stocks if the Trump administration follows the Republican agenda to cut U.S. taxes and regulation, and focus on fiscal stimulus. Significant downside risks exists, however, if Trump veers into protectionism and sparks a global trade war.

    The key to investment success this year will be to balance probabilities. Investors increasingly are adopting a wait and see attitude before committing more capital. After a stellar 2016 performance for Indonesian equities, the market has gone sideways with about a 1% return year-to-date.

    In stark contrast to rhetoric from Washington, Finance Minister Sri Mulyani made much sense when she opined that Indonesia’s economic fundamentals must be strengthened but not with protectionist or counterproductive policies. Indonesia must focus on strengthening the domestic economy, and investors should do the same but focus on valuations and a possible rerating of country risk.

    Given the headwinds surrounding global trade, the Indonesian government will likely attribute more importance to supporting growth in setting policy; 2017 GDP growth is seen at 5.1%. The JCI is forecast this year to rise from the current 5,380 to 5,800 (an 8% gain) driven by earnings growth. PE multiples are expected to fall to 14.8x under the base scenario; JCI could rise to 6,100 under an optimistic scenario (up 13%) or fall to 4,925 (down 9%) if fiscal spending disappoints and U.S. yields rise more than expected. A fundamental rerating of Indonesian equities could happen in this year when S&P reviews its country rating for Indonesia. The chart below shows the best performing sectors year to date, and the most expensive sectors by PE. The cheapest sectors by PE now are financials, at 9x, and oil and gas at 5x. The sectors with the most decline are healthcare, down 3%, and telecom, down 1%, year to date.

    Moody’s followed Fitch in raising its outlook to positive, showing that Indonesia’s credit rating is on an uptrend. S&P’s key criteria, including fiscal spending quality and banking NPLs, are also improving. The government seems fully cognizant of the elevated external risks and thus is motivated to push structural reforms and “Jokowinomics” even further. Investors in Indonesian equities should take notice.