Great Reset 2020: The COVID-19 situation has brought upon a great reset (Great Reset 2020) for Indonesia’s overextended GDP output which saw 2019 nominal GDP declining to 6.7% from 9-10% in 2017-2018. Had the COVID-19 crisis not occurred, we think it would have been a reset anyway (slower) as the country’s CAD was breaching 3%, exports were not growing and FDI growth was slow. The ‘Great Reset’ instead brought about many metrics back to levels 8 to 10 years ago: CAD level at unextended -0.7% of GDP, System LDR at 87%, high FX imports cover, high deposit balance, and historically low bonds and equity foreign ownership.

Triple equity levers: We see triple catalysts for 2021E and beyond: (1) Cyclical recovery — when a reset year is invoked, the natural GDP output gap will be closed and the economy will naturally recover (assuming no great disaster in 2021E) as was last seen in 2015-16; the cause then was the declining commodities price and the 30% depreciation in rupiah, while now, activities of general public due to the lockdown measures are struggling to recover. (2) Indonesia is breaking out of the CAD trap that has plagued the nation for eight years since 2013, even without Omnibus Law or FDI inflow, we are seeing renewed focus by government agencies in inviting FDI and efforts that started 5-6 years ago, such as Iron and Steel value chain, is bearing fruit with more investments there committed. We are long-term positive on Indonesia FDI, we think investors should assume as a base case that FDI has to improve in Indonesia, especially as the Positive Investment List will be introduced by January. (3) High domestic liquidity and a buoyant external environment has resulted in major banks’ TD rates going to a low 3% from 5% earlier this year, yield spread has widened with short-term rates declining, domestic portfolio we believe will continue its shift to higher risk equity asset. We also see likelihood for a combination of economic acceleration and rupiah appreciation to a low Rp13k handle as we expect Indo bond spread to lower on better GEM risk profile.

JCI 2021E Year-end index target at 6,600 which primarily incorporates cyclical recovery;FDI surge may provide further re-rating opportunity. CS large cap top picks are: BBRI,BBNI, BBCA (financials), ADRO (coal), ICBP (GARP), SMRA and JSMR (recovery plays).Mid-cap picks are: MAPA, BDMN, PNBN, EXCL, ISAT.

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