Jakarta declares Covid-19 emergency
Jakarta will reinstate wider large-scale social restrictions (PSBB) effective 14 September following a surge in Covid-19 cases. The Jakarta governor Anies Baswedan warned the hospital system is on the verge of collapse if there is no emergency brake as 77% of its isolation beds for Covid-19 patients are already in use. The number of Covid -19 cases in Jakarta is the highest in Indonesia with 51,287 cases or 24.8% confirmed cases nationwide. The death rate, isolation ward occupancy, ICU occupancy all show that the outbreak in Jakarta is in emergency mode. The Jakarta economy which comprise about 18% of the national economy contracted by 8.2% in 2Q20 (vs. national economy contraction of 5.32%) following Covid-19 first case in March and the first implementation of PSBB in 10-April. In 1Q20, the Jakarta economy grew by 5.06% which is higher than national growth of 2.97%. Given the economic role of Jakarta, we believe this second round PSBB is a move that make Indonesia’s economic recovery even more challenging and would force the Jokowi administration to walk a tightrope between public health and economic revival.
Negative market reaction
The JCI index reacted negatively to the overnight announcement of second PSBB, triggering a circuit breaker in the morning and dropped by 5.0% to 4,891 today. The index has also been one of the worst performing in the region so far this year, declining by more than 22% compared with the 1% gain in the MSCI Asia ex-Japan Index. Market panic returned after reaching an all-time high in March alone, when the Indonesia stock exchange’s (IDX) circuit breaker was triggered six times. The damage on the economy will be dictated by the duration of PSBB which is not specified but will be likely to be reviewed every two weeks depending upon health indicators. The risks arise from the renewed restrictions on Jakarta to contain an increasing trend of new Covid-19 cases will hold back the pace of rebound in consumer spending and corporate earnings. Post 2Q20 results, our universe (70% of total JCI’s market cap) aggregate earnings are expected to decline 26% YoY to Rp191 tn in 2020F and recover by 31% YoY to Rp250 tn in 2021F translating to market EPS of 297 and 389, respectively. The longer the PSBB, the greater the risk of lasting economic damage, piling pressure on government to provide more stimulus to aid businesses and the rising number of unemployed
Expecting short-term volatility, our stock selection
As we are not factoring in second round of PSBB , we expect near term market volatility in September and could even see a sharp correction but will not retest the March low. We believe consumer staples (UNVR, INDF, ICBP), Telco (TLKM), Pharmaceuticals (KLBF) stocks, being essentials, are expected to do well during the PSBB. We also like tanker stock (BULL) as the more gradual the recovery, the better for tanker stocks while its earnings is expected to grow by triple digit and double digit in 2020-21F. Our sector picks for longer-term remain i) banks (a proxy to domestic economy): BBRI and BMRI, ii) defensive names: ICBP, UNVR, TLKM, TBIG, iii) infra/utilities plays: SMGR and PGAS and iv) gold stock (MDKA).