Credit Suisse Cuts Indonesia Stocks, a Move That Burned JPM

(Bloomberg) -- Credit Suisse Group AG has downgraded Indonesia’s equities market to a sell rating, despite the government backlash JPMorgan Chase & Co. received more than two years ago for a similar move.

“We now see an opportunity to reduce exposure to Indonesian assets before the market enters a phase of underperformance,” London-based analysts led by Alexander Redman wrote in a report dated Feb. 11. The bank’s research team now has a bearish call with six reasons why investors should sell the nation’s shares. Those include an overbought rupiah and stock market, a liquidity squeeze and economic growth that may be set for “strong negative revisions.”

Credit Suisse Cuts Indonesia Stocks, a Move That Burned JPM

When JPMorgan downgraded its assessment of equities in Southeast Asia’s largest economy in late 2016, Indonesia’s finance ministry retaliated by cutting ties with the U.S. bank and stopped using the firm as a primary dealer and underwriter of its sovereign bonds. A couple of weeks after that, JPMorgan raised its recommendation on the nation’s stocks to neutral, citing lower redemption and bond volatility risks.

Credit Suisse isn’t listed as a primary dealer on the Indonesia Stock Exchange’s website, nor does the firm underwrite government bonds. It does have an equities brokerage through PT Credit Suisse Sekuritas Indonesia. The firm didn’t immediately respond to requests for comment about the extent of its relationship with the Indonesian government or the country’s markets.

The nation’s benchmark Jakarta Composite Index fell as much as 1.6 percent Tuesday, declining for a fourth day -- its longest losing streak since October. The Credit Suisse downgrade may have been at least partially responsible for the drop, Alan Richardson, an Asean fund manager at Samsung Asset Management, wrote in an email. Foreign investors sold $40 million net of Indonesian stocks, trimming their year-to-date purchases to $948 million.

John Rachmat, the PT Pinnacle Persada Investama strategist who correctly called a bear run on Indonesian stocks twice, said Credit Suisse’s call was daring but too early. Lower oil prices, which would alleviate pressure on the country’s current account, easing inflation coupled with the Federal Reserve’s new “patient” stance, and economic growth that “has found rejuvenated strength in 2018” will keep demand for Indonesian assets for now, he said, adding that the bullish trend should last until at least May.

Herman Koeswanto, head of research at PT Ashmore Asset Management Indonesia, sees some reason for caution but maintains a more optimistic outlook on the country’s stocks.

“We remain bullish on Indonesia as the country is on the right path toward industrialization, which will help sort the current deficit problem in the long run,” Koeswanto said in an interview. “However, tactically I think investors should raise cash at this point, as in March there are some events that might cause some uncertainties in the market.”

Both Koeswanto and Pinnacle’s Rachmat said the Brexit negotiations and outcome from the U.S.-China trade talks are among the key events that might influence the market next month.

Credit Suisse’s call reduces its positioning in Indonesian stocks to 10 percent underweight from 20 percent overweight.

“As such we close out of a long-term above-benchmark exposure to Indonesian equities put in place on 2 June 2016, over the duration of which MSCI Indonesia has performed in line with overall emerging markets,” the Credit Suisse report said.

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