As Bank Indonesia (BI) moves to tighten the monetary situation by raising rates, Indonesia'€™s economy will undoubtedly slow. This will in turn lead to lower corporate earnings. With decreased profitability from many listed Indonesian companies, securities companies, foreign and local alike, will be reducing not only target prices on stocks, but also sector ratings, including individual equity recommendations.

At Bahana Securities, our stock recommendations have come down in line with our recent earnings downgrades on Indonesian corporates due to the country'€™s lower GDP growth. Exhibit 1. shows that at that the start of 2013, out of the 82 stocks under our coverage, we had 58 percent BUY ratings, followed by 21 percent HOLDs and 21 percent REDUCE recommendations. However, going into 2014, we now have just 53 percent BUY ratings, 9 percent HOLD recommendations and 38 percent REDUCE for the 85 companies in our basket of stocks, reflecting the current increasingly more difficult operating conditions for Indonesian corporates.

Against such a backdrop, we urge listed Indonesian companies not to turn their backs on research analysts and the investment community in general. Our past experience is that corporates'€™ investor relations (IR) departments have the propensity to close their doors to research analysts or stock brokers with negative ratings/recommendations on their stocks.

Such actions by IR departments of publicly listed companies are deplorable in our view and should be avoided at all costs.

At a time when corporate earnings are depressed, it is imperative that companies take positive actions and establish proactive stances in the form of improved corporate governance (CG) and greater transparency by opening up their doors rather than closing them shut. IR departments must provide explanations to the market of corrective actions to support companies'€™ earnings growth. These explanations are necessary to create a positive image for every listed company rather than creating unnecessary hard feelings and hiding behind closed doors.

So why does this behavior of alienating analysts or securities companies by corporates often occur in the market place?

Unfortunately, the core of the problem lies with the company owners. Majority shareholders often create bonus schemes for IR people that are tied to how well their companies'€™ stock prices perform. On top of that many company directors are shareholders through management stock-option programs (MSOPs). These stock-ownership programs often exacerbate the situation as company directors feel that their personal wealth is vulnerable to negative stock ratings or recommendations coming from equity research analysts.

However, we would like to take this opportunity to inform corporates that the sooner the corporate strategies to counteract current drags on earnings are conveyed to the investment community, the sooner analysts can alter their negative views on various stocks. It is important for companies to comprehend that whenever possible analysts and salespeople in the market prefer to possess positive views on stocks and create buying opportunities for clients and fund managers.

In sum, we encourage company owners to instruct their directors and IR departments to continue to adhere to good CG practices and implement greater transparency even amid the most difficult of market conditions. Finally, we urge both the Stock Exchange as well as the Financial Services Authority (OJK) to constantly remind Indonesian listed companies of the responsibilities that come with being public corporations, which include keeping their doors wide open to the investment community at all times.

The writer is Senior Associate Director/Head of Equities and Research at PT Bahana Securities

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