Highlight Monthly Commentary - July 2022

08/03/2022

Macroeconomics

Indonesia 1H22 budget realization recorded a surplus of Rp73.6tn from a surplus of Rp132.2tn in 5M22. 1H22 investment realization reached Rp 584tn (51% of FY22 target); an increase of 32%YoY. June trade balance recorded a surplus of USD 5.09bn and brought 1H22 trade surplus of USD24.9bn vs USD11.8bn in 1H21. BI kept the interest rate unchanged at 3.5% for 18 consecutive months as core inflation remained manageable. July CPI increased 0.64%MoM bringing annual inflation at +4.94%YoY. Core inflation increased to 2.86% from 2.63% in the previous period.

Equity

JCI gained 0.57% in the past one month with around Rp 2.25tn net foreign sell. The market started the month in soft tone as rupiah weakness triggered foreign outflow. Solid macro data of June trade surplus provided a tailwind to the market. The market rallied at the last week of the month, along with global indices, on expectation that inflation was peaking. The best sector performer was IDXEnergy (+13.4%) on elevated coal price and higher demand from European countries to build their energy reserve ahead of winter. IDXIndustrial (+8.1%) was the second-best performer which was lifted by mining contracting companies. IDXBasicmaterial (+5.1%) posted a solid performance on the back of petrochemical and metal mining names rally.

The global indices mostly gained on expectation that inflation was peaking and corporate earnings remained resilient amid the rising rate environment. Many central banks hiked rates to combat inflation. The China market underperformed its peers due to higher covid cases and lockdown in several areas.

We remain cautiously positive on equities as the fundamental reform and recovery story remains intact. However, we expect continuing volatility in the market following global recession fears on the back of higher inflationary environment and geopolitical situation.

Fixed Income

Indonesia 10 years government bond yield decreased 14.2bps to 7.12% compared to the previous month. In comparison, the US 10-year treasury note decreased by 36.2bps to 2.651%. The fed hiked policy rate by 75bps for 2 consecutive time to tame inflation; taking the benchmark rate to a range of 2.25%-2.5%. Mr. Powell mentioned there would be a time where Fed started to slow hikes and assess the impact. The Fed reiterated its strong commitment to bring down inflation despite causing the growth to slow down in near term. Based on DMO bond flow data as of July 26, Foreign ownership recorded at 15.4% of the outstanding and outflow of Rp143.4tn YTD. Indonesia 10 years USD global bond yield at 3.92%. IDR slightly appreciated to 14,833.

Higher inflation and rising interest rates remain as challenges to the bond market though we think that the negative sentiments have been mostly priced in reflected by the large foreign outflow YTD. We think local investors will be the main supporter of IndoGB in the near term while foreign investors would be in defensive mode as inflation risk remains.

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