The rally in U.S. stocks worries me, as I've noted before. It appears to be entirely disassociated from business fundamentals and driven by pure momentum.
Given the strong rally in developed economies, it may make sense to watch for rebounds in emerging markets. Many of them have seen significant recoveries since lows in March, but there are a few laggards.
Indonesian stocks have been Asia's worst performers so far this year. The benchmark Jakarta Stock Exchange Composite Index is down 21.2% in 2020, regaining less than half the ground it lost through its March low.
Local brokerage Verdhana Sekuritas Indonesia recently has formed a partnership with the Japanese investment bank Nomura Holdings NMR. Verdhana covers 57 Indonesian companies in 10 different sectors, research now distributed by Nomura, which will use Verdhana as its onshore broker for all Indonesian orders.
In initiating coverage of the market, the pair has identified nine top picks for the Indonesian market. Of those, seven have ADRs that trade on U.S. markets. I'll briefly highlight the merits of each stock.
Bank Central Asia, with a U.S. listing under PBCRY, has seen its share price beaten down, which could make for a solid entry point in a long-term defensive holding. The Nomura/Verdhana team consider the country's third-largest bank to have the strongest earnings and balance sheet, with a strong retail presence that provides cheap access to funds. It tends to be the name investors gravitate toward when money moves into banking stocks.
Kalbe Farma, with a U.S. listing under PTKFY, is the largest listed pharmaceutical company in Southeast Asia. Mainly making generic drugs and non-prescription cold and flu medications as well as health supplements, it is an overlooked stock, according to the research team. The worst negatives of any downturn in the pharma segment should be past the company, while over-the-counter drug and health product sales should benefit from sustained long-term structural growth.
This month, Kalbe Farma signed a deal to conduct clinical trials for a DNA vaccine prototype to combat Covid-19 with the Korean company Genexine. It will conduct human trials in Indonesia of the vaccine candidate, known as GX-19.
The company also has the broadest drug-distribution network in Indonesia, delivering its own and other companies' drugs to 1 million drugstores around the country.
Unilever Indonesia, with a U.S. listing under UNLRY, presents a safe haven with its huge shelf full of consumer staples: deodorant, toothpaste, detergent, food. That should ensure a relatively stable top line, because its sales stem from basic household spending. Unilever has a particularly high exposure among its rivals to middle-income consumers and also has a modern supply network. Its health care and cleaning products in particular, like Lifebuoy hand sanitizer, may benefit from structural category growth as consumers shift behavior in the wake of the virus.
In the world's largest majority Muslim nation, Unilever launched a cleaning products line under the brand Sahaja that meshes with Islamic code. The stock is already outperforming the market and trades at higher valuations, but both conditions should continue.
Bank Rakyat Indonesia (BRI), with a U.S. listing under BKRKY, is the largest bank in the country. The government announced on Wednesday that it would shift the equivalent of US$2.1 billion from its account with the central bank to BRI and three other state banks so they can make loans to stimulate the economy.
The government has asked the banks to leverage the money by 300% within three months. BRI will prioritize loans to medical equipment businesses, food production companies and farmers. BRI has a particularly strong micro-loan business, which is benefitting from the application of technology. Better tech simultaneously improves the bank's cost ratio while making it more difficult for competitors to enter the segment. Its back-to-basics approach should enhance earnings and improve asset quality.
Astra International, with a U.S. listing under PTAIY, is Indonesia's largest conglomerate and top automotive group, selling Toyota, Isuzu and Daihatsu cars and scooters. It also sells tractors and offers car loans, and it owns the port in East Kalimantan, near the site of Indonesia's planned new capital on the island of Borneo.
Astra is viewed as a barometer of the overall Indonesian economy due to its many heavy-industry operations. The stock is oversold, according to the research team, with a value of 1.0x book that is close to its value during the financial crisis. Overseas ownership has sunk to its lowest level in the last 10 years. It may be re-rated in terms of valuation if foreign investors rediscover Indonesian stocks.
Jasa Marga, with a U.S. listing under PTJSY, builds and manages toll roads, which under normal circumstances would be a booming business linking the world's largest archipelago. It has been building the ring roads around Jakarta, one of the most snarled cities in Asia.
Thanks to the coronavirus outbreak, the company has seen its share price hammered. However, it should experience a rapid V-shaped recovery in toll traffic as the Indonesian economy opens back up. It also will be receiving hefty government compensation. The Nomura/ Verdhana team expect its toll-road earnings to post a positive surprise.
Mitra Adiperkasa, with a U.S. listing under PMDKY, runs retail stores and restaurants for 150 brands as well as department stores. It has 2,200 stores around the country, with the franchise for Starbucks (SBUX) , Domino's Pizza (DPZ) and Nine West. It should be a structural beneficiary from Indonesia's rising middle class, and the research team believes it should be able to restore sales to pre-Covid levels. If its earnings and share-price multiple rebound by the end of 2021, that implies a 50% upside between now and then.
Pakuwon Jati, only listed in Jakarta as PWON, is a property developer based in Indonesia's "second city," Surabaya, specializing in office and shopping mall development there and in Jakarta. It has been developing mixed-use "superblocks," renting out the space and selling off condo developments it builds.
The research team says the shares are underpriced, effectively priced only at the value of its mall portfolio. That means there's a free land bank for investors. Its strong retail portfolio should see the stock rebound once the economic paralysis abates.
Medikaloka Hermina, only listed in Jakarta as HEAL, runs 32 hospitals across 17 Indonesian cities. It began life specializing in maternity hospitals, but now manages general hospitals with around 4,410 beds as well as outpatient centers. Operations have been hurt as Indonesia restricted non-essential medical treatments during the Covid-19 outbreak.
The stock has been a laggard but should benefit long term as private patients return. Its 2021 earnings should see a V-shaped recovery after the easing of the pandemic.
Those nine stocks will be worth watching for a rebound should the Jakarta market come back. Only the market in the Philippines, down 20.8% in 2020, is posting comparable declines in Asia.
Incidentally, the Philippine Stock Exchange on Wednesday closed its headquarters and trading floor for 24 hours after an employee tested positive for Covid-19, although it says trading was not affected. The premises are being decontaminated and the Philippine Stock Index fell 1.7% after the country posted a one-day record for new Covid cases on Tuesday.
Indonesia has also been hit hard by the virus, with the largest death toll in East Asia outside China, 2,535 deaths out of 47,896 confirmed cases. However, the country has not entered a comprehensive lockdown, and greater Jakarta is relaxing its restrictions, which are the strictest in the country, despite a case and death count that is still rising.
The government said this week that the jobless rate in Indonesia could climb as high as 9.2% this year, up from 5.3% in 2019, and could remain high most of next year. To avert the worst, the government is spending nearly US$50 billion on health care, social protection and economic stimulus to mitigate the impact of the virus on the economy.
Nevertheless, the economy will turn from 5.0% growth last year to a 2.7% economic decline this year as forecast by Oxford Economics. It then should rebound sharply to 7.0% growth in 2021. Indonesian stocks therefore may be solid performers in the virus aftermath if and when that rebound occurs.