Brace for a market recovery

Stock down in May as Fed rate hike looms

A surprise indication from the U.S. Federal Reserve that it may raise interest rates at its next policy meeting in June weighed on global stock markets in May. The intensifying debate of a US Fed's June hike has also been dampening global investors' appetite for Indonesian stocks and Rupiah. JCI edged down marginally by 0.9% to 4,797 points. It continued to stay in the green-zone with 5M16 gain of 4.4%. However, Rupiah emerged as the worst performing currencies with a depreciation of 3.4% to 13,648/USD. Foreigners sold USD17 mn in Indonesian equity market and USD517 mn in bond market in May. Our economist believes that the Fed still put its concern over low inflationary pressure on slumped energy prices and recent weak readings on spending and production. This led some of FOMC members stated that the likelihood of June's benchmark rate hike may be low.

Attaching hope on tax amnesty

The government is confronted with steep hurdles in its bid to boost the country’s economy in the midst of weak state revenue collection and a protracted decline in global demand. The latest data showed that tax collected as of April amounted to Rp283 tn, only around 20% of this year’s Rp1,546 tn target. The government expects to book additional tax revenue of up to Rp180 bn from the tax amnesty bill currently being deliberated at the House of Representatives. Ministry of Finance signaled its confidence that the tax amnesty scheme could begin this year. That said, potential positive news around the tax amnesty bill, if approved by the Parliament, would bring near term catalyst for the Rupiah and capital market in general. The S&P global ratings just refrained from raising Indonesia to investment grade on the country's stagnant fiscal performance, while leaving the door open for a future upgrade

Better political environment seen

We see more political stability in Indonesia as President Jokowi is enjoying support from an overwhelming majority in the parliament. Soon after his winning, newly-installed general chairman of Golkar, Setya Novanto, announced   the party’s decision to renegade the coalition of opposition parties (KMP) and joined the ruling coalition. We believe Jokowi will enjoy the election of Novanto as one having problem would be easier to control. Even Novanto has said that Golkar would support Jokowi in the next presidential election in 2019. Golkar's arrival meant that ruling coalition now controls more than 75% of seats in the parliament. We do not rule out the possibility that Jokowi to frequently act against PDIP, ruling party which has helped Jokowi in building up his political career as his political vehicle.

Our stock picks up 2.1% in May, continue outperforming the JCI

Our stock picks gained 2.1% in May, outperforming the JCI by 3.0%%, with EXCL (1.7%), WSKT (7.0%)  and SILO  (19.8%) becoming top performers. We saw investor accumulated WSKT ahead of the stock inclusion into MSCI effectively on 31 May. Our healthcare recommendation SILO, showed a very strong gain of 19.8%. We previously argued that the stock was very cheap, trading below 2stdev of its historical EV/EBITDA mean. EXCL also delivered handsome gain of 1.7%, while we believe its fundamental will significantly improve post rights issue. We are taking a view of market improvement in June, and recommend investors to focus on our stock pick in the following table. JCI is trading at 15.3x forward PER, only slightly above historical mean of 15.2x.