MARKET UPDATE U.S. GDP + 5.0% Bayu Cahyadi bayu.cahyadi@profindo.com JCI Current 5139.07 2015 Target 5750 (11.9% upside) Overweight Sector Banks Cement Telcos Construction Pharmacy Toll Road U.S. Economy 3Q14 Expand 5% Last night, the United States of America announced that its 3Q14 GDP grew by 5.0%, above previous estimate of 3.9% as well as economists’ estimate of 4.3%. The growth rate is supported by strong household spending (+3.2%), in line with strong labor market and declining oil price. The GDP number, the fastest number in 11 years, sent the Dow Jones Industrial Average (DJIA) index to above 18k. The news is favorable for the U.S., but may be not for emerging economies such as Indonesia. When an economy is speeding, the government as well as the central bank may put an effort to slow it down to prevent bubble in the economy. There are at least two risks to consider: money outflow from the emerging economies and faster Fed Rate increase. Flash Back on Financial Crisis A little flash back, in 2008, U.S. economy experienced financial crisis due to subprime mortgage, sent the DJIA from its highest level at that time at 14,198 on October 7, nd 2007 to the very low level at 6,469 on March 2 , 2009. Even, one of the largest investment banks in the U.S., Lehman Brothers, declared bankruptcy in 2008 following the massive exodus of most of its clients, drastic losses in its stocks and devaluation of its assets by credit rating agency. In order to stimulate the economy, the US central bank decided to set the Fed Fund Rate at the lowest level of 0.0 to 0.25% on December 16, 2008. In addition, The Fed introduced Quantitative Easing (QE), buying financial assets such as government bond to directly increase private sector spending in the economy. 24 December 2014 www.profindo.com The US Economy Recovers The QE program looks promising, sending the US GDP from USD 14.4 tn in 2010 to USD 16.8 tn in 2014. After reaching The Fed’s target: steady economic growth, 6.5% unemployment rate and 2% inflation rate; The Fed decided to stop the QE program in October 2014. Then, The Fed plans to start increasing the Fed Rate in 2015. At the FOMC meeting in December 2014, The Fed stated that they will not increase the interest rate before 2Q15, which creates a bullish sentiment in the market. Importantly, we have to face the truth that increasing Fed Rate will put pressure in our economy. Market Update US Offers Better Reward/Risk Ratio According to Damodaran, the equity risk premium in the U.S. was 5.0%, 4% lower than in Indonesia. However, the economy growth for both countries is similar – around 5%, which stated the fact that investing in Indonesia is riskier but less rewarding. Being conservative, investors would put their money in the U.S. rather than in Indonesia because the developed country offers better reward/risk ratio. This fact would stimulate money outflow from emerging markets to the U.S. Foreign Net Sell in December Although since the beginning of 2014 to Nov 14 foreign investors posted a huge net buy of Rp 48.86 tn in Indonesia, they started to do the selling, posted a net sell of Rp 7.64 tn from Dec 1 to Dec 23. We believe that investors are anticipating the better GDP growth rate in the U.S. After the real number came out, we expect more selling from the foreign. Big Portion in Banks and Telco From the beginning of 2014, foreign investors bought a bunch of banking shares namely PT Bank Mandiri Tbk (BMRI) and PT Bank BRI Tbk (BBRI) as well as telco: PT Telekomunikasi Indonesia Tbk (TLKM) and PT Tower Bersama Tbk (TBIG). Our Recommendation Looking at a big number in bank and telco shares, we are assuming the share price will decline in the short term as the foreign investors need some cash to put in the U.S. market. This may become an opportunity for investors to buy all the shares mentioned in this report at a bargaining price as we remain bullish on those stocks in 2015. In our market outlook 2015 report, we estimate that JCI may reach 5750 FY15. Stocks Mentioned CODE BMRI BBRI TLKM TBIG Market Cap (IDR) 247 tn 284 tn 286 tn 46 tn Target Price 3150 12500 11500 Unrated 2015 Profindo Rating Overweight Overweight Overweight Overweight Key Chart U.S. GDP Indonesia GDP U.S Unemployment Rate U.S. Fed Fund Rates Source: Tradingeconomics Page |2 Market Update KANTOR PUSAT KANTOR CABANG BANDUNG http://www.profindo.com Gedung Permata Kuningan, Lt. 19 Jl. Kuningan Mulia, Kav. 9C, Guntur Setiabudi Jakarta Selatan 12980 Phone : +62 21 8378 0888 Fax : +62 21 8378 0889 Jl. Sunda No. 50B Bandung, Jawa Barat Phone : +62 22 420 2678 Fax : +62 22 420 2676 EMAIL : bayu.cahyadi@profindo.com abdul.aziz@profindo.com DISCLAIMER This research report is prepared by PT PROFINDO INTERNATIONAL SECURITIES for information purposes only and is not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. The report has been prepared without regard to individual financial circumstance, need or objective of person to receive it. The securities discussed in this report may not be suitable for all investors. The appropriateness of any particular investment or strategy whether opined on or referred to in this report or otherwise will depend on an investor’s individual circumstance and objective and should be independently evaluated and confirmed by such investor, and, if appropriate, with his professional advisers independently before adoption or implementation (either as is or varied). 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