JPMorgan has upgraded its view on Indonesian stocks just weeks after a negative stance prompted the government to sever all official ties with the bank.
Jakarta stopped using the U.S. investment bank as a primary dealer or an underwriter for sovereign bonds after JPMorgan's Asia-Pacific equity strategists in November slashed the country's equity rating outlook by two categories to "underweight".
In research sent to clients on Monday, however, JPMorgan's team said it was closing the "tactical underweight" recommendation in place since November and instead advised a "neutral" stance.
"Our tactical downgrade two months ago was driven by the risk of Indonesia underperforming the Asia Pacific ex-Japan and emerging market indices as investors de-risked," the analysts wrote. "Redemption and bond volatility risks have now played out, in our view."
A spokesman for the bank denied there was any link between Indonesia's rebuke of the bank and the change in its analysts' views.
"JPMorgan's research is independent and anything published is a result of extensive and objective analysis. Our research views and recommendations on Indonesia are no different," he said.
Jakarta's move against the bank caused a stir in Asia, in part because JPMorgan's underweight stance applied only to its stock market rather than Indonesia's bond market, which more closely reflects views on government policy and so is regarded as more sensitive for the state.
Indonesia's bond market is particularly susceptible to outflows, with almost 40 percent of its dollar debt held by foreigners.
Last week, Sri Mulyani Indrawati, Indonesia's finance minister, defended the decision to cut ties with the bank, saying the downgrade "provoked irrational behaviour" by making negative comments at a time of economic uncertainty following the U.S. election victory of Donald Trump.
Research analysts at other institutions have expressed support for their rival. Governments in Asia have often tried to pressure banks, most recently in late November when Malaysia asked banks to stop trading ringgit derivatives it felt were "speculative and damaging".
The head of equity research at one large bank in Asia said: "If we started changing our views at an Asian government's request, we'd be in way bigger trouble with U.S. regulators over research independence than we'd ever possibly gain from doing so."
Since the U.S. election, the Jakarta Composite index has fallen 3.7 percent, compared with a 1.8 percent gain for the broader MSCI Asia-Pacific Index and a flat performance by global emerging market stocks.
JPMorgan's analysts on Monday added in their report: "Indonesia's macro fundamentals are strong, with high potential growth rate and low debt-to-GDP with economic reform."
In the same report, they increased an underweight position on Korean stocks, downgraded Taiwan to underweight from neutral and Malaysia to neutral from overweight.