Nomura: Indonesia shares set to recover in 2019

Indonesian rupiah notesIndonesian rupiah notes

Nomura tipped remaining Overweight on Indonesia’s market in 2019, after 2018’s stumble, amid signs of a recovery.

“After a turbulent ride this year, driven mostly by a weaker currency caused by higher bond yields in the U.S., a trade war and crises in  Argentina and Turkey, we are expecting a steadier ride in 2019 supported by accelerating GDP growth, a less volatile Indonesian rupiah outlook, solid earnings growth and reasonable valuation supported by multi-year lows in foreign investors’ positioning,” Nomura said in a recent strategy note.

It set a Jakarta Composite Index target of 6800 by end-2019, based on a 12-month forward price-to-earnings ratio of 14.5 times, only slightly above the post-Global Financial Crisis average of 14.2 times.

Economic growth

Nomura said its house view was for the economy to strengthen in 2019, with pro-active and coordinated policy responses, and it forecast gross domestic product growth of 5.4 percent next year, compared with a consensus expectation for 5.1 percent. That was on expectations of investment spending growth and the end of a period of a widening current account deficit and a tightening cycle from Bank Indonesia, it said.

Declining oil prices should help bolster the current account, it said. Despite being an oil producer, Indonesia still imports much of its oil. The country’s central bank also hiked interest rates by 175 basis points this year to support the rupiah, which had fallen to lows not seen since the Asian Financial Crisis in the late 1990s.

It also noted that President Jokowi appeared poised to win a second five-year term, with a stronger mandate.

Nomura was forecasting earnings growth of 12 percent for 2019, slightly above its forecast of 12 percent for 2018, and the fastest in Southeast Asia.

Valuations in the equity market also remained attractive, Nomura said, noting it has de-rated from a peak of 16.5 times 12-month forward price-to-earnings in February to around 14.4 times recently.

The investment bank tipped domestic stocks to play the recovery story.

“As we still cannot ignore the risk from external factors in 2019, we believe positioning in large-cap, domestically driven stocks should provide the best risk and return proposition,” Nomura said. “The large banks we expect will continue to do well, as they reprice their assets yields, while in auto and consumers, a more favourable rupiah and the end of the interest rate hike should be supportive. Lastly, after a tough year in 2018, we expect sequential recovery in mobile revenues in the telcos.”

Nomura tipped its top picks as Bank Mandiri, Astra International, Telkom Indonesia, ACE Hardware and Mitra Adiperkasa.

But Nomura also pointed to risks for the market.

While lower oil prices are generally a positive for the net oil importer, it could also hurt the country’s key export commodities, such as natural gas, LNG, coal and crude palm oil.

“If these commodities experience a protracted downturn in prices, and if China slows by significantly more than what the market is expecting, these factors could have a negative impact on its terms of trade,” Nomura said.

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