Our top picks up by only 0.3% in July, underperforming the JCI for the first time
The Indonesian equity market was very bullish in August (month-to-date 25 Aug) rising 4.6% as foreign fund continued flowing in. However, our model portfolio was only inched up by 0.3% in July, underperforming the JCI significantly, dragged by worse-than-expected return in EXCL (-17%), JSMR (-4.2%) and GGRM (-1.0%). EXCL unexpectedly reported poor 2Q16 results while the stock got hammered to limit down price on the day of its results announcement. JSMR was also among notable underperformers, down by 4.2% in August as the company may lack of near term catalyst despite its upcoming rights issue plan. Outstanding performers were found in banks (BBCA + 5.2%), property (BSDE + 6.2%). Despite underperforming the JCI for the first time in Aug, our portfolio still gained by 28.1% compared to the JCI rising 18.7% in year-to-date basis.
Add AISA and JPFA into our portfolio
We admitted that it is very challenging to pick the stock when a large volume of fund flow propels most of the stock ahead faster than the overall market. We reviewed our top picks and removed EXCL and JSMR from the list and replaced them with AISA and JPFA. We like AISA and JPFA on their cheapest valuation in the respective sectors, supported by strong earnings growth outlook. Our analyst believe that AISA’s current valuation at 2017F PER of 10.2x (against EPS growth of 32%) is very attractive, especially compared to the sector’s 2017 PER of 24.6x. Meanwhile, JPFA is trading at single digit 2017F PER of 8.6x and subscription by Kohlberg Kravis Roberts & Co L.P (KKR) for shares in JPFA will not only strengthen JPFA’s balance sheet but allow the company to benefit from KKR’s deep knowledge and experience in the agriculture and food sector.
Focus on Fed’s decision
As we still see strong domestic macro and political background, we believe the only downside risk to our year-end index target of 5,800 is that the Fed rate hike comes sooner than later. Foreign fund flow into Indonesia has started to abate a little last week due to the shift of focus back to the US Fed on their exact timing and pace of further rate hike after its meeting on last Friday. However, the degree of slowdown in net foreign buying was less apparent relative to its regional peers, only 1% down from peak level of USD3.03 bn, vs regional peers of between 2.5-7.1% declines. Global investors may have arguably taken a preemptive move to relocate a portion of their portfolio to the US government bond market, resulting in a general weakness of emerging market currencies. So far this year, whenever news suggested the Fed might raise rates, stock markets generally went down and vice versa.
Still expecting an ensuing Fed hike in 2017
We believe no one can predict with 100% accuracy the movements of interest rates not even US Fed itself. We remained skeptical of the Fed's rate hike projections largely because of the perceived wide gap between what it has signaled and ultimately delivered. At the beginning of the year the Fed forecasted that it would raise rate four times this year. However, a global growth slowdown, concerns about China’s economy, weak oil prices and choppy U.S. data has buffeted the Fed. We see US economic data has been mixed lately, believing that US inflationary and GDP growth had not been firm enough to support rate increases. Therefore, we are still reluctant to buy into this year rate hike story, at least without more information on the evolution of jobs growth, the pace of economic activity, or higher inflation and see the next most likely hike in early 2017. Moreover, the upcoming presidential election in November creates significant uncertainty and normally points to the Fed holding off on any policy moves.
