Moods remain positive

Our top picks gained 9.1% in January, outperforming market’s flat return

In January, ten stocks under our top picks list rose by 9.1% on average, exceeding JCI which inched up by only 0.4%. The distribution does not look well balanced with six stocks rising between 3.9%-27.8% while the remaining four stocks declined by 1.8% to 9.1%. GIAA rose significantly 27.8% as the company reported strong December’s operational figures coupled with positive sentiment from continued lower oil price. INDF gained 19.8% on positive sentiment from Minzhong divestment process which could lead to company’s stronger cash flow and lower gearing ratio. ADHI also jumped by 19.2% as it reported 52% new contract growth for 2015. On the weak side, LPPF was down 9.1% following significant outperformance in Dec-15.

Regaining loss momentum over foreign inflow

Indonesian equity markets turned around for the better last week. The Rupiah and the price of crude oil which are among main determinants in the equity market has reversed course. Rupiah appreciated by 0.6%, bringing YTD appreciation of 1.4% against USD to 13,700. Meanwhile, crude oil price gained 29% to USD33.5/bbl, rebounding from 12-year low of USD26/bbl. On global factors, it is expected that central banks across the globe will continue to take drastic steps to support global growth, which will benefit equities. BoJ's bold move to adopt negative interest rate policy come days after the US Federal Reserve decided to keep interest rates unchanged. After three weeks of relatively intense selling, foreign funds bought back Indonesian equity last week, buying on a net basis USD110 mn of equity, bringing YTD inflow of USD103 mn at end of Jan from net outflow of USD7 mn at 3rd week of January. Indonesia also enjoyed the biggest inflow compared to regional peers such as the Philippines of USD54.2 mn and Thailand of USD72.1mn.

Still attractive valuation, maintain index target of 5,700

After having underperformed the region in 2015, we believe there is a good chance for the market to re-rate now, as our three major catalysts for 2016 which are a BI rate cut, rising infrastructure spending and higher economic growth remain intact. We are also positive with tax amnesty bill which will be submitted to parliament this week. It is estimated that tax amnesty plan would generate of up to USD4.4 bn of additional revenue for the government, boosting the government's capex. Our JCI target of 5,700 for the 2016 year-end implies better risk-reward post underperformance in 2015. The JCI is trading at 2016F PER of 12.8x vs. 12% EPS growth, which is more attractive than Asian peers’ average valuation of 13.4 with earnings growth of 9%. On historical basis, valuation is close to one standard deviation below its 5-year mean on PER of 14.2x. Moreover, despite flat return in January, the JCI has outperformed its Asian peers by far (3%-27%).