Key Takeaways
• JCI return +7.65% YTD turned out to be the best performing equity index in APAC despite unfavorable macro- environment.
• Rising inflation followed by the increase in risk free rate historically followed by JCI valuation de-rating, particularly when inflation overshoot BI’s ITF.
• Our macro model showed that risk free rate & inflation have significant & negative impact on JCI valuation.
• Given inflation rose +4.94% YoY in Jul- 22, overshooting BI’s upper target by +94% and with risk free rate at 7.20% we expect the fair value for JCI should be at 6,898 (-2.70% from current position) implying 14.3x FY22E P/E for Aug-22.
• Macro factors that favor JCI valuation are : government and foreign deficit balance meaning that there is a net inflow of money into private sector as a saver building their financial asset position. This also should justify inflows to equity market (>IDR50tn) vs outflows from govt. bond (>IDR130tn) YTD.
• Key downside risks for 2H22 JCI valuation : 1) higher than expected inflation; 2) a more normalized or even lower commodity prices & 3) fiscal consolidation agenda.
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