End-2016F JCI target of 5,200
After a long-held cautious stance on Indonesia’s macro outlook since 2012, our economist Euben Paracuelles has turned more constructive on prospects for more stimulatory fiscal and monetary policies, plus a series of bite-sized reforms that cumulatively look more investment-friendly. As such, he expects a gradual domestic demand-led recovery in 2016F, having raised 2016F/2017F GDP growth expectations to 5.2%/5.6% (from 4.7%/5.1%), putting us above consensus at 4.9% for 2016 (see Indonesia: Silver linings).
Infrastructure delivery to improve after disappointing progress
High hopes of infrastructure progress in 2015 were largely dashed as the new government has faced administrative challenges from the restructuring of the ministries and other political manoeuvrings. However, we look for improvement in 2016 as the government is stepping up disbursement of capex and tackling bottlenecks by holding early tendering of contracts and simplifying guidelines at the local government level. It is also encouraging that the government seems to be committed to protecting the capital spending budget, if needed, by cutting other operational expenses and allowing wider fiscal deficits, while also utilising multilateral and bilateral funding.
Earnings appear to have bottomed and valuations more reasonable
Indonesia’s earnings have been under pressure in 2015, with consensus expecting an earnings decline of 6.3%. However, given the improvement expected in growth and easing pressure on costs from lower inflation and rates, we believe that earnings have bottomed. For 2016, consensus is expecting earnings growth of 10.3%, which we believe is achievable given our new GDP forecasts. Valuations are now also more reasonable, with the MSCI Indonesia index trading close to its post global financial crisis average (vs more than 2SD above in April). We set our JCI target at 5,200 for end-2016.
Sector and top picks
We are more positive on the market outlook for 2016 given the expected improvement in GDP growth, relatively benign inflation allowing the central bank to potentially cut interest rates after the Fed lift-off, and better execution in infrastructure projects. The first beneficiaries of these will be rate cyclicals such as construction, property, banks and infrastructure, while consumers should follow with a lag. Our top picks are as below and discussed within.