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STRATEGY REPORT - Stay vigilant on risk of correction



What were the top laggards & leaders stock in 1H20?

The JCI dropped by 22.1% to 4,905 in 1H20.  We looked at various stocks in JCI that have contributed the most to the decline and have seen selling pressure. Among JCI constituents, large-caps bank led the lagging movers (see Exh. 1) including: BBRI (-28.9% in 1H20; contributing -135.1 points decrease to JCI), BMRI (-32.9%; -100.6 points), BBCA (-13.5%; -97.0 points). We believe this is caused the expectations that the Covid-19 outbreak will hit banking sectors through weaker economic growth, slower credit growth and dampened profitability. This is followed by ASII (-28.4%; -69.2 points) as weakening purchasing power following business disruptions caused by the pandemic has battered the country’s automotive industry (-27% YoY in car sales in 5M20 to 248.3 k units). From the top leaders pack, there were plenty of rally in several stocks that might have got unnoticed due to their thin trading liquidity such as SMMA (+18.5% ; contributed 16.2 points increase to JCI), CARE (+210.7%  ; +6.5 points) and DNET (14.0%  ; +5.5 points) . Other top laggards stock are TOWR (+32.7%; 11.5 points) where we also rate the stock as Buy and our gold producer pick MDKA (+25.8%; +5.5 points).


Retail investors continue to support market despite foreign outflows

According to Indonesia Stock Exchange (IDX) director, retail investors dominate stock trading in Indonesia, accounting for 52% of the trading value in June. Sustained retail domestic money flow into equity market has helped to drive a stock market rally in June. Based on data from KSEI (Indonesia Central Securities Depository), retail investors ownership continue to rise by 2% MoM to Rp830 tn in June (see Exh. 2) which is 30% of total domestic investors holding portion in IDX and 19% of total investors holding (domestic and foreign). However, foreign investors were net sellers and occurred every day for the last third consecutive week. They off-loaded local equities worth about USD318 MTD in June and USD1.04 bn YTD (see Exh. 3) and led the rupiah tumbled to 14,265/USD.


Expecting pull back in coming months

Following strong performance in June, we believe the JCI is likely to pull back this month as global market factors turned more negative while local market heading to the 2Q20 result season. Regarding the external factors, Covid-19 infections look worse as the WHO warns the pandemic is not even close to being over, as the number of deaths worldwide exceeds 500,000. We also expect that selling pressure will be driven by corporate earnings that would post further weaker figures in 2Q20 earnings release (in July-August) as impacts of Covid-19 become more obvious.  Moreover, Indonesia is expected to register the worst and negative GDP growth in 2Q20 (to be released in August and our economist sees 4.03% contraction), after a sharp drop in the previous quarter. The country is still in partial lockdown and preparing to re-open, guarded mainly by transmission rates and the tradeoff between public health and economic loss. As at end of June, 56,385 Covid-19 cases have been confirmed in Indonesia with 2,876 deaths and 24,806 recoveries have been recorded thus far.


Our top picks beats index in June, replacing BTPS with BMRI

In June, our top picks posted average gain of 7.1%, notably outperforming the benchmark JCI that rose by 3.2% to 4,905. Major contributors to our top picks strong return in June were WIKA which rose 15.1%, followed by other solid gain in ICBP (14.7%), BTPS (10.4%).  Other picks (TBIG and MDKA) also outperformed JCI well, up by both 5%. Meanwhile, the remaining stocks underperformed the JCI such as BBRI (+2.7%), UNVR (+1.9%), TLKM (+1.8%) and SMGR (-1.4%). As for 1H20, JCI moved down  by 22.1% while our top picks managed to outperformed the index by 4.4% mainly supported by 26% gain in our gold pick MDKA coupled with  10.2% decline in TBIG. Post solid gain in June, we see BTPS has limited upside to our TP and we decide to replace it with BMRI. Our banking analyst believe BMRI has better attractive risk-reward being the second largest bank in Indonesia with strong franchise in retail & corporate banking. Our other top picks remain BBRI, UNVR, ICBP, TBIG, TLKM, WIKA, SMGR, MDKA (Exh. 4).