We view that the market is at an inflection point of mean-reversal and ready to kick up a gear! Our strategist bottom-up FY16 index target is 5,700, implying 17.3xPE16 (reverting to 5-year mean). Top picks: BBRI, BBNI, INTP, GGRM, PTPP, WSKT, ADHI, CTRA, PWON and BSDE. Several important points below that get us excited with the market:
• Over-adjustment. Rupiah has weakened by 60% and set back the economy by 5 years
• Jokowi’s honeymoon period starts now! It looks like political consolidation has happened and recently we saw very strong confidence reversal among business stakeholders.
• Massive pick-up in infra spending. Money has actually been disbursed not just tendered/awarded.
• Weak Rupiah has successfully clamped down non-productive spending. CAD is now entirely due to non-trade items, specifically FDI income transfer. CAD, however, can comfortably be funded through FDI.
• Plenty of demand drivers going forward: 1)possible rate cuts (and perhaps possible fuel price cut?), 2)tax reform initiatives, 3) first round effect of infra ramp-up, 4)minimum wage hike of 11% (8% real), 5) faster spending by regional Government.
• Market is trading at sub -1std deviation on depressed earnings. We saw 26% downgrade in the past 12 months
• Do you really need more catalysts? Our research team will explore more! Our upcoming series will discuss on 1) infrastructure false starts, 2) rupiah the tail that wags the dog, 3) tax amnesty misinformation, 4) five-year cycle reining in credit appetite, and 5) Hardwired commodity – what’s the number? On the whole, we think these concerns have their merits.