Two steps down and one step up in two months
JPMorgan Chase (JPM) has upgraded its view on Indonesian equities (EIDO) (IDX) to “neutral,” one notch above its “underweight” rating. The interesting bit is not the upgrade itself but the fact that it occurred just two months after a downgrade. In November 2016, JPM had downgraded its view on the country’s stocks by two notches from its “overweight” grade.
The downward move was announced following the victory of Donald Trump, which was expected to lead to outflows from emerging market equities with JPM expecting Indonesian equities to take a bigger beating than other emerging market peers.
What followed as a backlash to the downgrade was the Indonesian government suspending all business activities with JPMorgan Chase. This meant the government put an immediate halt to using the bank’s services as a primary dealer and underwriter for its bond issuances.
The Financial Times reported that Indonesia’s finance minister Sri Mulyani Indrawati justified the ban on business with JPM by stating last week that the downgrade “provoked irrational behavior.”
Independence versus business
Though the Financial Times reported that a spokesperson for JPM “denied there was any link between Indonesia’s rebuke of the bank and the change in its analysts’ views,” it would be exceptionally difficult to prove or believe this.
If the analysts had indeed believed that improved fundamentals would help Indonesia minimize the outflows caused by a Trump victory, they would not have downgraded the country’s equities by two notches in November in the first place. Meanwhile, if Indonesian equities did react excessively negatively to the election of Trump, then they could have effected two separate downgrades as the situation deteriorated.
The instance has subsequently raised questions surrounding the independence of ratings in Indonesia. Though the impetus for the successive moves is not conclusive, it does illuminate another situation where politics are just as important as economics to watch for market outcomes.
