Equity Strategy

External Risks Loom, But Improving Domestic Conditions May Cushion Against Further De-rating

• Amid the possibility of further tariffs to be imposed by Trump, we think key risk to watch remains on EM currency and market risk-offs.
• However, we see improving domestic conditions with fiscal discipline to support growth and falling SRBI yield to potentially aid liquidity.
• JCI’s undemanding valuation and intact earnings growth outlook shall buffer valuation; we continue to favor quality stocks and IDR hedge.

Trump tariffs 2.0: volatilities and strong USD may still lie ahead

Post Trump’s announcement of new tariffs (25% tariff on Canada and Mexico and an additional 10% tariff on China), we see that the tone of the policy may remain negative for the market, amid the possibility for more tariffs to be imposed and retaliation from impacted countries. In Indonesia’s case, the first trade war in 2018-19 led to a ~15% depreciation of Rupiah and a widening of bond yield, driven by CNY depreciation and concerns on Indonesia’s CAD (-3.7% in 4Q18 amid worsening trade balance). During the Feb-Oct18 period, JCI corrected by 11% with the following sectors leading the underperformance: Media (-39%), Property (-36%), while the following sectors outperformed the market: Technology (+52%), Poultry (+42%).

Domestic conditions are improving

In contrast to condition in FY18, Indonesia’s CAD is now in a better condition (-0.6% of GDP as of 3Q24). Our macro team also noted a significant shift of late through fiscal discipline, coupled with BI’s recent rate cut, which signals its switch to pro-growth policies. Additionally, SRBI yields continued to decline, with the average yield falling to 6.71%, now below levels seen after the Sep24 rate cut, which may lead to improving liquidity. In terms of earnings, our EPS growth forecast of 6.5% remains intact, compared to FY18 EPS growth of 0% (largely led by the Telco sector at -48% yoy).

Jan25 fund positioning: trimming Banks, Telco

Domestic funds reduced their positioning in Banks (-121bps) and Telco (-39bps) in Jan25 and added weighting in Petrochem (+145bps) and Metals (+110bps), based on latest KSEI data. As of Jan25-end, funds were still OW in Banks (+389bps), Telco (+269bps), Consumer (+262bps) and Retailers (+82bps) and UW in Petrochem (-220bps) and Metals (-142bps). The trimming in Banks in Jan25 (largely through BBRI -140bps) came despite the surprise BI policy rate cut which in our view reflected funds’ conservative positioning.

JCI: undemanding valuation and intact growth outlook

The recent market sell-off has brought JCI’s valuation to 12.7x PE, with earnings yield at 82bps over the 10-year yield (vs. 3-year average of 46bps). While the key risk to watch remains on EM currency amid the possibility of further tariffs to be imposed, we think JCI’s undemanding valuation and improving domestic conditions should buffer further de-rating. We continue to prefer quality stocks and hedge against USD and thus, our tactical picks for 1Q25 are: UNTR (Buy, TP Rp31,000), BBCA (Buy, TP Rp11,900), ICBP (Buy, TP Rp14,000), JPFA (Buy, TP Rp2,800), GOTO (Buy, TP Rp90).

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