Deutsche Indonesia Strategy - Ripple amid a rising tidal wave

Too trivial to stand in the way of the market rally
A market that outperformed regionally in almost eight consecutive years is not going to be derailed by a case of higher chili or rice prices. We believe that is too trivial and missing the structural change in a country that is breaking out of a lost decade. We remain very positive on the market and reiterate that our almost year-old 3,333 index target is at risk of upward revision. See Figure 1 for our top-picks.

Not to outsmart weathermen
We believe the recent concern over inflation was exaggerated and misplaced. We are not in the business to beat the weatherman, but a recent increase in food prices is cyclical and weather related, though prices may remain high into the festive season, in our view. Let us not lose sight of the bigger picture because inflation is heading towards a structurally benign inflation environment for two important reasons.

Structurally lower inflation
Sustaining a stable to strong rupiah: for BI to sell more than US$27bn of rupiah in the past one and half years speaks volumes for the direction of the rupiah. Capital inflow would only increase further as the country’s sovereign rating moves into investment grade. Also, the supply-side expansion is responding to rising demand, rather than singularly through a price hike during the lost decade. As it is, inflation is running close to half the level from that period.

Further lending rates decline: Credit infusion growth to be sustained
Regardless of BI’s interest rates policy, lending rates will likely continue to decline. Competition dynamics among banks for lending is far more influential than a marginal increase in policy rates. Indeed, our bank's analyst also noted the lag in lending rates decline such that interest rates differential between lending rates and SBI are near a five-year high of c.7.0% for working capital, c.9.0% for consumer and c.6.3% for investment loans. As such, we believe the sustained easy-credit environment, being the single biggest driver of the economy, remains very conducive to facilitating the economy to double again over the next five years.