Market remains in recovery mode

Assessing the economic implications of Brexit

The UK referendum vote to leave the EU has understandably prompted a significant market reaction. We expect overall impact of the Brexit to be insignificant due to Indonesia's limited exposure to the UK. In general, the impact would be indirect and may come from a prolonged global slowdown. On the positive side, we see global interest rates could remain exceptionally low and US is unlikely to raise interest rates. In terms of currency impact, the Rupiah is likely to depreciate against the USD. Nevertheless, we believe, the degree of the depreciation would likely be manageable as it will be cushioned by Indonesia's manageable CAD and robust forex reserve position of nearly USD104 bn. On trade front, Indonesia export exposure to the UK is very small, representing to around 1% of total exports. At the corporate level, none of all stocks under our coverage has revenue exposure to UK.

Banking on tax amnesty for take-off

Indonesian parliamentary just approved a tax amnesty bill which is expected to help the government gain additional tax revenue needed to finance a widening budget gap. The government can start offering an amnesty rate of between 2% and 10% for tax payers going forward with their untaxed wealth at home and abroad. The lowest rate would be given to those repatriating their offshore assets back home, in addition to declaring them.  Tax amnesty should help support currency near-term and provide positive sentiment on Indonesia stock market. Further support will happen if there is a successful outcome when the citizens declare their overseas assets and pay fees, and repatriate money. So the impact will more likely be in the medium to long term. We take the view that tax amnesty would mainly benefit 1) real-estate developers, 2) banks, 3) contractors, and 4) consumer companies.

Our top picks handily beats the JCI in June

On MTD 28 June 2016, our stock picks posted averaged return of 3.8% vs. the JCI’s of 1.8% with 6 out of 10 stock recommendations beating JCI respectively by 1%-12%. Outstanding performers were found in property (BSDE being up by 13.7%) on planned tax amnesty bill introduction and healthcare recommendation (SILO being up by 13.8%), which is still trading below -1stdev historical EV/EBITDA. Our construction recommendations were also among the best performers, with ADHI being up by the 6.6%. Our telecoms pick, EXCL, continued to post positive return and went up by 6.2%. This strong performance brings its YTD performance to 19.2%, exceeding the JCI by 12.9% . We correctly predicted that there would be market improvement in June and now expect it to continue in July.

Slightly lowering JCI target to 5,400 on lower market EPS forecast

We believe that the current market strong performance has further legs going forward as good macro data and better political environment should lift investor sentiment.  We believe the impact from the tax amnesty bill will mitigate Brexit impact in near to medium term.  We still  see the risk/reward ratio will not deteriorate, as JCI is now trading at 15.3x forward PE, still below +1stdev of historical mean. However, we slightly lower our 2016-end JCI target to 5,400, as we slash market EPS target. This was due to recent downward revisions in banks and cement companies earnings forecasts. We are keeping our preference for exposure to domestic demand, higher government spending and defensive names. We maintain BBCA, GGRM, INDF, LPPF, JSMR, WSKT, PTPP, ADHI , SILO and EXCL as our top picks.