In our note of 9 March on Taiwan, we highlighted Taiwan tech’ 26% outperformance from its 5 December lows on the back of a slowing trend in consensus EPS downgrades.
Rather than chasing Taiwan tech after such a strong outperformance, we highlight Indonesia. In the first 10 days of March, 2009E Indonesian consensus EPS was -0.4% versus - 3.4% in February, -10.4% in January and -14% in December.
We also highlight that on our P/BV versus ROE valuation model, Indonesia is the most inexpensive market and trades at a 44% discount to the region. Historically, markets trade at a discount only when they anticipate large downgrades to earnings.
The key factor preventing us from upgrading Indonesia (from our current small UNDERWEIGHT) to Overweight is the currency risk. CS Economics forecasts a small current account deficit in 2009 of US$5.2 bn (1.3% of GDP) and the gap between FX reserves (US$40 bn estimate for 2009) and short-term external debt (US$35.6 bn) remains small. For details, see Cem Karacadag’ report, Indonesia: less risk than meets the eye.
Within Indonesia, the biggest discount is in Indonesian coal (a 192% discount now versus a 164% premium when we highlighted it as a “crowded” trade on 1 July 2008).
The second biggest discount is in Indonesian consumer cyclicals. We note that while Indonesian materials has been still associated with a downgrade to 2009E consensus EPS of -1.7% so far in March, consumer cyclicals have been associated with a 1.3% upgrade. Astra International is the top pick from the CS regional model portfolio.
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