Strategy Update /   Click here for full PDF version 
 Author(s): Jovent Muliadi; Timothy Handerson; Anthony 

• JCI dropped 4% in Nov (-2% YTD) and this marks two second consecutive years of negative equity return (vs. c.6% p.a. bond return).
• Based on our analysis and discussion with investors, we think these are the main causes: 1) weak growth, 2) tepid earnings and 3) sentiment.
• Improving sentiment (especially domestic), along with upside in growth and earnings underpin our unchanged JCI FY20 target of 6,900.

Another sell-off in Nov due to several factors
JCI dropped by another 4% in Nov, which brought overall YTD return to -2%, this marks 2nd consecutive year of negative equity return vs. +6% p.a. bond returns during the same period. Based on our analysis and discussion with several investors (both local and foreign), we believe these are the main causes for JCI underperformance: 1) weak economic growth (especially on nominal GDP side), 2) tepid earnings outlook and 3) sentiment (domestic factors like political and/or intervention noises along with external noises).
Sluggish nominal growth in 3Q, all-time low since 1999
Despite decent real GDP (5% in 3Q19), to our surprise nominal GDP was only at 5.9% in 3Q19, the lowest ever since 1999 (all-time low of 5%). This suggests a very weak ASP on the producer side which may due to slowing demand. This also resulted in lacklustre earnings growth (FY19F of 5%).
Other than in 2014, single digit earnings growth always resulted in JCI underperformance
Historically JCI always posted negative return during period of single digit earnings growth except for 2014 (rally was caused by the election euphoria). 9M19 earnings growth of 8% and FY19 expectation of 5% clearly wasn't attractive enough to compensate risk-adjusted return of holding equity as opposed to holding bonds.
Weak sentiment amidst domestic and external noises
Domestic noises such as political (uncertainty during presidential election and cabinet reshuffle) and intervention (lowering gas price/lending rate) has been major pushback for most of the investors. This was exacerbated by external noises such as trade war and riot in Hong Kong.
What may change next year?
We think generally next year will be a better year as: 1) domestic sentiment will not get any worse (subduing political/intervention overhang), 2) pick-up in economic growth, especially with empirical evidence in pick-up in investment from higher industrial estate sales and hopefully better government spending to offset lower consumption (from lower purchasing power) and 3) better earnings growth as we/consensus expect 10% earnings growth in FY20 (vs. 5% in FY19) which has high probability to achieve amid pick-up in banks earnings growth (post IFRS 9 implementation).
Maintain JCI target of 6,900
We maintain our FY20 JCI target of 6,900 (based on 2.3x P/BV - lower than its 10Y avg of 2.1x P/BV) with interest sensitive (banks/auto/tower) and selective staple ( UNVR , INDF ) as our picks. Risk is worse than expected earnings growth.

Sumber : IPS