Apr 29, 2015 08:00:19
Indo Strategy - Positioning amidst slowest growth in a decade Too early to bottom fish The market sharp sell-down may appear excessive, yet we think it may be too early to be an aggressive buyer. The outlook of subdued growth outlook, probably a bit slower, broader and longer lasting than most envisaged, suggests it is still better to seek out stocks with relative earnings visibility. Indeed there is little indication to suggest this slowdown has stabilized thus far. Broad based slowdown Growth that was designed to slowdown in order to rein in CAD, e.g. BI allowing Rp to weaken for an essentially dollarized economy, has proven to be very potent. Weaker commodity prices along with the transition easing from the recent investment surge may well have contributed as well. Indeed, the recent earnings trend suggests a more pronounced and broad-based slowdown. This ranges from large ticket items to even basic consumer staples. Bellwether FMCGs that have already reported are showing that top-line growth running at a decade low pace (ex-GFC period); a reflection of weaker buying power and rising competition. Equally, we have also noticed an uptick in NPL though more toward the SME and micro segments. In addition, our channel checks across various industries, including bellwether consumer packaging, mostly reported a deteriorating environment. Slower and longer? Contrary to general expectations, we think it is premature to assume an economic recovery in 2H15. Indeed sub-5% growth for the year cannot be ruled out. Recently the capex trend suggests easing post the initial surge 3-4 years ago. That along with the job creation trend, easily half the pace seen in the past couple of years, is not supportive of any fast economic recovery in the second half. While we remain upbeat that the govt. infrastructure spending will be punchier into 2H, we think the direct economic impact would be muted. Indeed the more powerful multiplier effect will only be visible in the medium term. Indeed there is little indication to suggest this slowdown has already stabilized. As such, we believe stock picking toward earnings visibility and predictability will be key in this 'new normal'. Macro improving vs Micro worsening - Market context In balance, we think the market downside risk is limited; yet we think it may be too early to be an aggressive buyer. We think the macro environment is turning more positive, e.g. CAD possibly below BI's guidance of 1.6% in 1Q, along with easing inflation, etc. Politics too, seems to have stabilized, which should pave the way for the govt. to kick-start major infrastructure projects. Yet, faced with the possibly of the slowest growth in a decade (ex-GFC), along with flow favoring North Asia, we think stock picking towards better earnings visibility matters, notwithstanding the fact that initial sell-down tends to be indiscriminate. Within our DB Portfolio stocks, we think the following have high earnings visibility: BBCA and BBNI (Banks), TLKM (Telco), ICBP and KLBF (Consumer). Conversely, stocks that have done well in spite of worsening earnings fundamental such as ASII and UNTR appear more exposed. $IHSG