Our top picks underperformed the JCI in June, weighed down by AISA and MEDC
In June, our stock picks declined by 6.8% and significantly underperformed the benchmark JCI that rose by 1.6% to another record high level of 5,830. We see window dressing occurred toward end of June as second quarter and first semester ended. The biggest cause of our stock picks underperformance was the sharp decline in AISA (-24%) following weaker-than-expected 1Q17 results and MEDC (-24%) on 5% decline in oil price in June and delay in 1Q17 results release. Our investment theme which focused on low valuation and relatively high earnings growth counters did not come through as the market favored large-cap stocks notwithstanding their strong outperformance Ytd. Our other stock picks (UNTR, INDF, LINK, WIKA) also generated negative return in July. On the strong side, BBNI and PWON managed to increase by both 1% in June, but still weaker than the JCI. We decided to replace AISA with EXCL (Buy, TP: Rp3,800) as the latter is expected to book an upward trend in EBITDA in its 2Q17 results. We still retain MEDC in top picks list as the company plans to release 1Q17 results on second week of July which we believe will register stronger earnings in QoQ and YoY basis on full impact of additional earnings from oil & gas field acquired in 4Q16. Regardless of their big underperformance in June, our top picks generated 11.3%, slightly higher than JCI’s of 10%.
Foreign investors net sellers in June, but still hold solid position in Indonesia market
Based on data by Bloomberg, foreign investors offloaded Indonesian equities by a USD324 mn in June, the largest monthly outflow this year. The heaviest foreign selling was recorded on 22 June with net disposals of USD152 mn which we attributed this to foreign investors consolidating their position ahead of full-week Lebaran holiday. Even so, foreigners had built a solid position on Indonesia equity market with cumulative foreign buying of USD1,304 mn in 1H17 (outpacing full-year 2016: USD1,259 mn), the second largest recipient after Malaysia equity market of USD2.3 bn. Moreover, average daily turnover in June was relatively strong at around Rp5 tn, down by only 10% from previous month. This came better than turnover during Ramadhan in last year which was down 15% MoM. Although foreigners turned net sellers in June, the JCI closed higher 1.6% MoM with MSCI Indo rose 2.4% outperforming Asia Pacific ex Japan index’s (MXAPJ) return of 1.4%.
A strong start in July
The JCI shot up another 1.38% to a fresh all-time high of 5,910 (+11.5% Ytd) on 3 July which was the reopening after a long holiday. Investors traded shares worth Rp8.72 tn with foreign investors making up 60% of the day’s transactions and booked Rp 476 bn in net buy. We see this was driven by positive domestic and regional sentiments. The Indonesian Central Bureau of Statistics (BPS) yesterday announces June inflation of 0.69% MoM. Although this came higher than market consensus of 0.6%, this was lower than the five year’s Ramadhan average of 0.82%. More interestingly, we saw the absent of significant food prices to the inflation number. On global sentiment, we see a silver lining from China’s manufacturing PMI. Most Asian markets were up as Investors took a surprise recovery in Chinese factory activity as evidence of steadying growth in China. China's manufacturing engine cranked back into growth mode in June, expanding at the fastest pace in three months after unexpectedly contracting in May.
Remain positive on Indonesia equity market
While acknowledging the fact that the primary trend is strongly intact, the market looks a bit overstretched now. We expect some immediate corrective activity this week and next week. Sentiment could move strongly positive ahead of 2Q17 earning releases in third and fourth week of July. Historically, second quarter earnings were stronger than the first quarter on acceleration in economic activity which mostly give positive impact to corporate earnings. We are still positive to the market on robust macro environment, market EPS growth forecast of 13.4%, and strong foreign investors inflow. Therefore, we maintain our Overweight stance on Indonesian equity market with YE-2017 JCI target of 6,200 (+17% YoY). I would not rule out the JCI trading at above our target this year as MXAPJ index has risen 18% Ytd vs JCI’s of 11.5%. We believe the gap will narrow following an upgrade to investment grade by S&P and the positive macroeconomic fundamentals. Indonesia is not demanding or expensive in comparison to other stock markets. Its valuation of 16.5x PER with 13.4% EPS growth is more attractive than average regional peers of 14.1x but with lower EPS growth of 3.2%.
