JP Morgan - an eventful week for Indonesia

This is going to be an eventful week; look for opportunistic buying window in a potentially volatile market. Domestically, Bank Mandiri and BRI will select their CEOs on 17 and 21 of May. Replacement for finance minister Sri Mulyani could be announced either on 20 May, or during the weekend of 23 May. Internationally, there is a chance that China revalues its Yuan sometime this week, before the big strategic meeting with the US officials on 24 May.

Stocks to watch:
(1) Bumi Resources – Moody’s may downgrade Ba3 rating, offset by potential consensus upgrade post Batu Hijau’s strong 1Q10 performance, rising gold price.
(2) Astra International – local city council looking to proceed with the 2008 regulation tax law. May slap 10% new tax on fuel (charged at the fuel pumps). May increase vehicle registration tax from 10% to 20%.
(3) Semen Gresik – beneficiary of EUR collapse. 5mn ton expansion plan costs US$600mnn, 1/3 of that in EUR as biggest supplier is based in Denmark. Consensus EPS too conservative after global NDR with the management.
(4) Medco – continuing noise/political pressure for government to decide on Donggi-Senoro gas allocation. M&A potential with Pertamina rumored to be potential acquiror.
(5) Property stocks – longer term beneficiary of ID strength and buoyant liquidity, potential opening-up to foreign ownership.

The JPMorgan view – on asset allocation, we are focused on a medium-term rebound in risky assets, accepting that the next month will be volatile. On equities, focus on Industrials and IT across sectors. Banks remain hostage to regulatory and legal risks. On FX, near-term bearish EUR, even as we flatline EUR/USD forecasts at 1.25. On commodities, stay long crude.

One can detect three different paths for risky assets over coming months. The first is down, in a repeat of the subprime/Lehman crisis of 2008. A second is volatile range trading as the bullish forces of growth and liquidity battle the bearish forces of uncertainty, back and forth to an eventual draw. The third is a clear victory of the bullish forces and a renewed rally, just as happened after the Jan/Feb correction. Our eyes are on the third –– the rally –– although we recognise that the rise in fundamental uncertainty that we are seeing could easily make us range trade for another 1-2 months in risky assets, as investors stay on the sidelines, waiting for the dust to settle