J.P. Morgan Reverses Course on Indonesia Stocks
Jakarta, 18 Rabiul Akhir 1438/17 January 2007 (MINA) – J.P. Morgan Chase & Co. upgraded its assessment of Indonesian stocks Monday, after a downgrade two months ago led finance officials in the Southeast Asian nation to cut business ties with the U.S. bank.
J.P. Morgan raised its asset allocation for Indonesian stocks one notch to neutral, saying bond-volatility risks had “played out” since Donald Trump’s surprise win in the U.S. election and could subside further if Mr. Trump’s incoming administration focuses more on trade than pro-growth policies, wsj.com reported.
In November, the largest U.S. bank by assets had downgraded its rating on Indonesian equities to underweight from overweight, citing the effects of increasing bond-market volatility following Mr. Trump’s election victory. An underweight rating means the bank expects an investment to underperform others over the next six to 12 months.
Indonesia finance officials balked at the report, saying it wasn’t credible and could destabilize the country’s financial system. They removed J.P. Morgan from a list of about 20 financial institutions serving as primary dealers for the government’s rupiah bonds and said the bank could no longer act as underwriter for the ministry’s global offerings.
Indonesia also revised rules for primary dealers this month, saying banks have a duty to uphold Indonesia’s interests. Many in the industry interpreted that as a veiled warning not to issue negative research reports. Indonesia has said it is open to negative assessments as long as they are substantiated.
In a report on Asia-Pacific equities on Monday, J.P. Morgan said that “the rise in bond yields and large redemption in emerging-market funds we feared occurred” but that its tactical concerns in Indonesia’s downgrade “had played out.”
The bank said it believes a period of high bond volatility has passed, and noted that outflow from Indonesian government bonds had ceased 15 days after Mr. Trump’s win. In contrast, during the “taper tantrum” in 2013—when global markets feared central banks were about to close the spigot of cheap post-financial-crisis cash—Indonesian government-bond outflows persisted for 77 days.
In general, “Asian equities proved resilient in the post-Trump bond volatility shock,” the report said.
Schneider Siahaan, director of debt portfolio and strategy at Indonesia’s Finance Ministry, said the bank’s new assessment of the country’s stocks wouldn’t have any effect on Indonesia’s decision to sever business ties, including for the bank’s role as a primary dealer of government rupiah bonds.
“It’s not going to make any difference, because they have to wait 12 months” before reapplying to become a primary dealer, he said. Still, “if they’re cooperative in the future, it will be easier for the government to consider reappointing them.”
“It’s good that they corrected it,” said Darmin Nasution, coordinating minister for the economy. If analysts say that “Trump becoming president will have a slight impact on [Indonesian] markets, it makes sense. But if you say the impact is high, that’s too much.”
In its new report, J.P. Morgan suggested its November call had been the correct one, saying it was “driven by the risk of Indonesia underperforming the Asia Pacific ex-Japan and emerging-market indices as investors de-risked” and that Indonesia had subsequently underperformed a regional index.
Supporting factor
Separately, J.P. Morgan said its research department “publishes independent views and recommendations based on extensive and objective analysis. Our research views and recommendations on Indonesia are no different.”
The bank said in its report that a supporting factor in upgrading Indonesia included improving consumer data in Southeast Asia’s largest economy and noted its decision last week to upgrade to overweight its rating on car maker Astra International, one of Inndonesia’s largest companies by market capitalization.
J.P. Morgan also said it is concerned about volatility from events in the first half of 2017 and that it managed the risk with the neutral call. It referred to a list of dozens of political, monetary and other events around the world, including Indonesian gubernatorial elections in February.
The bank also upgraded Australian equities to overweight from neutral. It downgraded Malaysian equities to neutral. (T/RS05/RS01)
Mi’raj Islamic News Agency (MINA)