Equity Strategy

Repricing the Risk; Potential Tactical Reliefs to Emerge

• JCI’s risk premium has reset higher on fiscal pressure, policy noise, negative sovereign outlooks, and MSCI deletions/ down-weight.
• We see three ST potential tactical reliefs: foreign flow exhaustion, easing seasonal Rupiah pressure and the oil/war narrative peak.
• We see JCI earnings-yield-to-bond spread of 242bps to have priced in a bear scenario. We revise FY26 JCI target to 7,200.

Repricing the risk. JCI's 29.1% YTD decline reflects a higher Indonesia risk premium, not merely a broad EM selloff. We see four linked drivers: fiscal risks from the Iran/Hormuz oil shock (YTD-average ICP at US$88/bbl), weaker policy predictability (e.g., mining royalty flip-flops, single-SOE export plan), twin negative sovereign outlooks from Moody's and Fitch, and the MSCI review and deletion of six Indonesian large-caps. YTD equity outflows of US$3.1bn should reflect foreign investors’ de-risking.

Potential tactical reliefs. We see three tactical reliefs over the next 6-8 weeks. First, as MSCI mechanical selling clears on May 29, large-cap stocks such as Big-4 banks have already absorbed our aggressive-case estimate (BBCA's YTD outflow has reached US$162.6mn versus our US$176mn estimate for the full rebalance). Second, 2Q is seasonally the worst IDR window due to dividend repatriation and Hajj FX demand, and should ease into 3Q. Third, the oil/war narrative may peak even if the average price remains elevated, unwinding part of the EM oil-importer risk premium on Indonesia. These do not resolve the sovereign rating risk or broader policy overhang but in our view should drive market rebound.

Valuation has priced in near-term stress. The JCI earnings-yield-to-bond spread is 242bps versus an 11-year average of -31bps, or c.270bp wider than its long-run norm. As consensus’ FY26 EPS growth (14%) is broadly in line with BRIDS (13.4%), the wider spread is compensation for risk premium. We see possible near-term risk on S&P outlook revision at the Jul26 outlook review (not a rating cut), but this should be well priced in. A worse case of actual rating cut (a one notch cut would still put Indonesia in BBB) would typically only come after a 12-18 month cure window. Nonetheless, MSCI Market Accessibility review in Jun26 also remains a binary risk.

JCI target revision. We revise our Dec26 JCI target to 7,200 from 9,440. The cut reflects the removal of the 40% conglomerate flow premium embedded in the old target, as the MSCI review has removed the rationale for that premium. The new target is based on BRIDS FY26-27 EPS growth of 13/ 14%, but with bank growth cut to 4-5% on cautious outlook; midpoint FY26-27 EPS; and base-case Rf assumption of 6.9% and earning yield-bond spread 220bps. This implies +17% upside from current level, with bull/bear scenarios at 8,600/ 6,550. We believe the potential asymmetrical return from current level is favourable.

Positioning. We separate the OW calls into two groups: valuation-cushion calls: Banks (BBCA Buy, TP Rp10,900), Healthcare (MIKA Buy, TP Rp3,300) and growth-call OWs: Telco (ISAT Buy TP Rp3,000), Metals (ANTM, Buy TP Rp4,900; TINS Buy TP Rp4,500). Consumer (ICBP Buy, TP Rp10,500; INDF Buy TP Rp9,400) and Poultry (CPIN Buy, TP Rp5,900) appear fair from risk perspective as their ERP are on par with JCI

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