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JPMorgan reverses bearish call that angered Jakarta

JPMorgan Chase & Co upgraded its assessment of the Indonesian stock market, reversing an earlier bearish call that prompted Jakarta to stop doing business with the US bank.

[SINGAPORE] JPMorgan Chase & Co upgraded its assessment of the Indonesian stock market, reversing an earlier bearish call that prompted Jakarta to stop doing business with the US bank.

The bank's analysts raised their "tactical" view of Indonesian equities one level to "neutral" in a report dated Monday, saying volatility in emerging-market bonds following Donald Trump's US election victory in November should now subside. The upgrade came two weeks after Indonesia's government cut business ties with JPMorgan, citing a two-notch equities downgrade by the bank in November.

"Our tactical downgrade two months ago was driven by the risk of Indonesia underperforming the Asia Pacific ex Japan and EM indices as investors de-risked," analysts led by Adrian Mowat said. "Redemption and bond volatility risks have now played out, in our view."

Indonesia welcomed JPMorgan's new assessment. The neutral recommendation is more in line with fundamentals, Coordinating Minister for Economic Affairs Darmin Nasution told reporters in Jakarta on Monday. The finance ministry had earlier said it would stop using JPMorgan as a primary dealer and an underwriter for sovereign bonds.

With its move to punish JPMorgan, Indonesia joined the ranks of emerging-market countries retaliating against analysts which publish negative research. Turkey's banking regulator issued an industrywide warning to avoid negative reports and in 2014, then Brazil President Dilma Rousseff chastised an analyst for suggesting her election would hurt the economy.

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JPMorgan's research "is independent and anything published is a result of extensive and objective analysis," the bank said in an e-mail. "Our research views and recommendations on Indonesia are no different."

Foreign investors sold a net US$2.8 billion of Indonesian stocks and bonds last quarter as emerging-market assets retreated following Trump's victory. That drove the rupiah lower, forcing policy makers to intervene to stabilise the currency. Indonesian stocks have under-performed wider emerging-market indexes since JPMorgan issued its downgrade on Nov 13.

Mr Mowat said in a phone interview that JPMorgan upgraded its view of Indonesian equities due to signs that the rise in US treasury yields has peaked, and that investors are returning to emerging markets. He said the decision to upgrade had nothing to do with the Indonesian government's actions.

Last week, Indonesia widened its campaign against negative research by ordering all primary dealers in Indonesian bonds to maintain relations with the government "based on professionalism, integrity and avoiding conflicts of interest."

Firms that fail to comply with the rule, which took effect on Dec 30, risk losing their dealership licenses, the government said. Global banks that are primary dealers in Indonesia's bonds include Standard Chartered Plc, HSBC Holdings Plc, Deutsche Bank AG and Citigroup Inc.

JPMorgan's latest move could form the basis of a compromise with the government, since the latest call remains somewhat negative, according to Alan Richardson, an investment manager at Samsung Asset Management in Hong Kong.

"A upgrade to neutral from the sell-side implies an upgrade from a hard sell to a soft sell. I would say the neutral recommendation should help to appease the Indonesia government," Mr Richardson said.

The new rules published last week state that banks which are suspended as primary dealers have to wait 12 months before reapplying.

As well as issuing the new call on Indonesia, JPMorgan's note upgraded equities in Australia and technology stocks in China. The brokerage downgraded Taiwan and Malaysia, and technology stocks in South Korea.


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