The U.S. brokerage company also advised investors to be cautious on a drag on corporate earnings due to currency depreciation, potential inflationary risks on higher global oil prices and political risks before the elections.
“Furthermore, profitability (margins) of corporates can be negatively impacted from higher import costs. This time around, the stronger dollar has led to earlier-than expected rate rises by Bank Indonesia, which have added further downside risk to corporate earnings; we have also seen risk-free rates spike up and portfolio outflows.”
source Morgan Stanley said its research division worried that currency related turmoils may lead to a 10 percent lower earnings than market consensus may have provided.
The brokerage company said it needed to warn investors after the first quarter earnings growth of Indonesian companies was just reaching 9 percent from the full year expectations. Consensus had expected this figure at 13 percent.
Meanwhile, despite market consensus for margins of non-bank companies to rise this year and next, Morgan Stanley saw the other way, given a weaker foreign exchange backdrop.
It also added higher global oil price may lead to a “potential back-end loaded inflation risk.”
The company cited Indonesian government has made it firm to maintain steady oil price in the retail level until 2019, calling it “a clear positive for inflation and helping to support what has been a lackluster low-income consumer.”
But the report estimated that the markets are already pricing for a potential soaring inflation in the future.
With regards to Indonesian politics, Morgan Stanley’s report said there is “a potential overhang.”
“April 2019 presidential elections could see some macro benefits – in example, increased capex (capital expenditure) or stimulus – but it could also bring uncertainty, which could deter foreign investors in the second half of 2018.”
The report said it will stick to its call that 2019 is a better year for Indonesian equities.
“More clarity around elections, (hopefully) an improved consumption environment and the start of realizing some of the benefits from infrastructure rollout.”