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STRATEGY REPORT - Positive outlook despite aggressive Covid-19 impact



June ends almost flat as volatility persists

The Indonesia stock market in June saw a slight rise of 0.6% to 5,985 in the JCI index as more severe coronavirus outbreaks and debate on Fed tapering vied with optimism on new vaccinations and economic recovery.  The JCI had initially rebounded by 2.7% from the end of May and temporarily topping 6,118 on 10-June but moved in extremely tight range after that. Indonesia started posting a new record of 14,536 daily Covid-19 cases on 21-June, its highest since the pandemic started.  We believe the surge in Covid cases was caused by increased mobility during the Idul Fitri holidays in May and the more virulent delta variant. This almost erased  positive effect coming from i) 16% increase in daily trading value ii) waning fear factor reflected by VIX decline and iii) foreign inflow. 


Technology and healthcare sectors top leaders in June

The equity market saw the small caps and mid-caps outperforming the large caps given that LQ45 index went down by 4.9% in June, notably underperforming the JCI return of 0.6%. The sectoral trends clearly veered towards tech and healthcare stories in June. Technology index was the star performer with 182% returns mainly driven by a 329% gain in DCI Indonesia (DCII). Unsurprisingly, healthcare sector (+5.3%) was also among the top performers. Two heavyweight sectors underperformed the JCI and gave negative returns were financials (-0.8%) and consumers non-cyclical (-3.4%). With a combined weight of over 52%, they had an oversized impact in depressing JCI return.


Still expecting a recovery in the economy this year

Driven by domestic demand and supported by external trade, our economist maintains 2021 GDP forecast of 3.8% (from -2.1% in 2020) , which is at the low end of government’s newly revised forecast range of 3.7-4.5% and consensus forecast of 4.5%. Our quarterly annualized GDP growth forecasts are as follows: 1Q21: -0.74%, 2Q21: 6.34% YoY, 3Q21: 5.30% and 4Q21: 4.93%. However, we are aware of the short-term downside risk such as more negative Covid-19 situation that will prolong lockdowns and reduce economic growth. Indonesia has only so far fully vaccinated 14 mn (5.2%) of its population of 270 mn, while about 16 mn people are partly vaccinated. On the positive note, the government’s plan to accelerate daily vaccination program from 1 mn in July to 2 mn in August will improve sentiment.  


Positive 2H21 outlook despite a volatile swing in near-term

The JCI is trading at forward PER of 14.5x which is still below its historical average of 16.0x. We see some short-term negative sentiment to continue affecting the market especially the persistence increase in the pandemic which more than double to 31,189 cases (vs. fresh record in June) as at time of writing. However, we also see the growing number of people vaccinated would leave the trading opportunity open. Taking into account growth prospect, valuation, and national inoculation efforts together with fiscal programs, we hold a positive view towards the 2H21 outlook of Indonesia market and remain upbeat about structural opportunities. Hence, we maintain our JCI end-2021 target at 6,750. We will revisit our corporate earnings and index target if the emergency mobility restriction lasts more than two months. We still favor: i) high-quality names (BBRI and ASII), ii) beneficiary of digitalization transformation trend (ARTO, TLKM and TBIG), iii) beneficiary of commodities upcycle (MDKA), iv) beneficiary of economic revival after pandemic (SMGR) and v) companies with high ESG profiles (TAPG and IMPC). We see potential listing of tech-based stocks such as Bukalapak and GoTo with combined potential valuation of up to USD45 bn, 9% of JCI’s current market cap of USD499 bn, could cushion market decline.


Our top picks up 1.7% in June, slightly beating the JCI 

Our June top picks rose by 1.7% (equal weight), which outperformed the JCI that inched up by 0.6%. The two picks under the same business group, TBIG and MDKA, rallied by 23.9% and 8.9%, respectively, to reflect M&A talk on TBIG and positive sentiment from rising copper price on MDKA. Another strong performance came from ARTO that gained by 12.1% where our banking analyst started coverage in May. The remaining six stock picks for June posted negative return where PGAS dropped by 9.9% followed by BBRI (-7.5%), ASII (-5.9%), TLKM (-3.0%), SMGR (-2.1%) and IMPC (-1.7%) which we believe were impacted by unfavorable market situations in June. Our model portfolio had an accumulated return of 4.4% since beginning of 2021, also beating the JCI that barely changed (+0.1% to 5,985). Meanwhile, we add TAPG and replace PGAS in our picks list.