Monthly Market Commentary - April 2021

05/05/2021
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Macroeconomics

The Ministry of Finance has released preliminary 2022 state budget where budget deficit is expected to narrow to 4.51-4.85% of GDP from 5.7% of GDP in 2021. The government set revenue growth target of 4.6-8.7% YoY from 6.7% YoY in 2021 assuming tax revenue growth of 3.8-5.8% YoY, a decline from 12.6% YoY target in 2021. On the other hand, government expenditure growth is targeted to contract to -4.95%-0.92% YoY in 2022 from 6.18% YoY in 2021. The full budget draft will be released in August.

BKPM announced 1Q21 FDI growth of 12.5% YoY, stronger than 9.9% YoY in 4Q20, driven by investment in secondary sectors including food & beverages, automotive, basic metals, machinery, and textiles. FDI coming in from the US and Europe also were seen increasing which is in-line with the economic recovery in the regions. On the other hand, DDI posted a decline of 4.7% YoY in 1Q21 driven by the tertiary sector. PPKM has led to decline in investments in transportation and construction. Meanwhile, investments in property and industrial estates as well as electricity showed solid growth during the quarter. Thus, all-in-all, direct investments grew by 4.3% YoY in 1Q21.

Indonesia reported inflation of 0.13% MoM or 1.42% YoY in April, a pick-up from 1.37% in March. Core inflation fell from 1.21% YoY in March to 1.18% YoY in April which we suspect is due to lower car prices following the government’s recent incentive to the auto sector. Food inflation was the main driver supported by rise in chicken, oil, and cigarettes prices. Restaurant and household equipment also helped drove up inflation during the month as we see higher traffic at public places such as shopping malls.

Indonesia reported trade balance at surplus of USD1.6bn in March compared to USD2.0bn in February. Exports rose by 30.5% YoY driven by CPO exports supported by both strong price and volume. Iron and steel exports to China also continued to be a supporter of the country’s exports. Meanwhile, the US’s recovering economy also helped boosted exports to the US. Imports rose by 26% YoY driven by oil and capital goods. Oil imports jumped by 43.6% YoY or 99.4% MoM driven by volume as oil price only increased 5% MoM in March.

The Ministry of finance reported a budget deficit of 0.82% of GDP as of 1Q21. Government revenue grew by 0.6% YoY driven by tax revenue growth of 3.7% YoY. Strong excise revenue was supported by cigarettes excise while solid trade performance helped revenues from export and import duties. However, tax incentives put pressure on non-excise and duties tax revenue during the quarter. Meanwhile, non-tax revenue still posted negative growth -8.4% YoY due to weak oil and gas revenue as well as lower SOE dividend payments. On the other hand, government expenditure grew by 15.6% YoY as of 1Q21. Central government spending grew strong by 26% YoY in 1Q21 as the government front-loaded spending. Material spending was the main driver as it grew by 81.6% YoY supported by vaccine roll-out and SME support realization. Capital expenditure also surged by 186.2% YoY driven by infrastructure projects. Meanwhile, social spending grew by 16.5% YoY despite the high base effect. PEN stimulus realization as of 1Q21 has reached 19.2% of FY2021 target with social safety net and SME support being the major contributors.

Forex reserve closed at USD137.1bn as of March, another increase from USD138.8bn in February due to government’s external debt repayments. Bank Indonesia maintained its policy rate at 3.50% in April and will continue to preserve stability. USD/IDR closed at IDR14,445/USD which appreciated by 0.6% MoM.

Equity

Local Market

JCI index remained volatile in April and ended the month with flattish return of 0.2% MoM. Foreign investors posted outflow during the month at USD244mn (IDR3.5tn) from the equity market. The market started off the month on a positive sentiment following President Biden’s USD2.25tn infrastructure stimulus announcement. Towards the end of April, President Biden mentioned his plans to raise capital gain tax for Americans earnings more than USD1mn per year which added some volatility to the market. The US President further announced another stimulus of about USD1.8tn aimed for education and childcare which will be financed by taxes. Easing US Treasury yield also added positive sentiments to the equity market earlier in the month though there are still volatilities now and then. Meanwhile, the Fed also reiterated its dovish stance and that economic recovery is needed before any tapering will be conducted. Chairman Powell added that dovish policies are needed and that the Fed is committed towards sustainable recovery and manageable inflation, hence, it would reach should inflation move beyond tolerable level. The US also reported its 1Q21 GDP growth of 6.4% driven by consumption. In Asia, China reported strong 1Q21 GDP growth of 18.3% YoY while PMI data across Asia also indicated consistent recovery. Indonesia recorded improving manufacturing PMI of 53.2 in March, an increase from 50.9 in February. Market went through headwinds during the month as new wave of COVID-19 infections occurred in multiple countries around the world. India became the new hotspot as its new cases reached 300,000 in one day, making the condition worse than the first wave last year. Countries have been rushing for vaccination to try curbing down infection. Meanwhile, the US claimed that about half of American adults have at least received one dose of the vaccine after it boosted its vaccination pace to almost 4mn dose a day. Indonesia’s COVID-19 conditions remained under control though vaccination pace fell from about 400,000 dose a day to about 260,000 dose a day due to vaccine shipment delays from India. The government has already negotiated with Sinovac for additional doses to cover the delayed vaccines. The private Vaksin Gotong Royong program is expected to begin in May as vaccines from Sinopharm arrived end of April while the Sputnik vaccine still awaits approval from BPOM. The government has implemented restrictions on mudik or homecoming during the Lebaran holidays in an effort to limit infections. Domestically, there are not many concerns with Indonesia fundamentally though lack of convictions as well as retail investors profit taking did add pressure to the market. Some retail investors were said to have moved from the equity market to cryptocurrencies. Mixed corporate earnings result outcome added to the market volatility though the results did show some improvements to earnings. In the meantime, investors are also assessing impacts of JCI index’s planned transition from market capitalization weighted index into a free float weighted index.

The Jakarta Basic Industry and Chemical Index was the winner again with 0.8% MoM gain in April. The poultry sector was among the drivers of the index supported by hopes of demand recovery ahead of Lebaran holiday while government’s culling program and limitation on grandparent stock imports gave support to broiler price. Petrochemical name, BRPT, rallied following TPIA’s strong performance last month after the rights issue announcement. Meanwhile, cement names also did well as industry cement data released by INTP indicated continuing MoM improvement as March sales volume have already exceeded March 2019’s or pre-covid volume. Top 5 drivers were: BRPT (+4.2%), JPFA (+9.9%), INTP (+5.1%), SMGR (+0.0%), and UNIC (+55.2%).

Global Market

The US market had another strong month, amidst concern on market bubble, driven by strong corporate earnings reports particularly from tech companies. DJIA 33,874.9 (+2.7%); S&P 500 3,181.2 (+5.2%); NASDAQ 13,962.7 (+5.4%). Meanwhile, President Biden announced a new USD1.8tn fiscal stimulus for the education and childcare sectors. Financing will also rely on taxes. On the monetary side, the Fed maintained its policy rates and asset purchases during April’s FOMC meeting. Chairman Powell mentioned that the Fed is still not discussion on timeline for tapering.

The Asian markets mostly posted positive returns in April driven by vaccination progress, easing US Treasury yield, and economic recovery. NIKKEI 28,812.6 (-1.3%); Hang Seng 28,724.9 (+1.2%); Shanghai Comp 3,446.9 (+0.1%); Straits Times 3,218.3 (+1.7%); FTSE Malay KLCI 1,601.7 (+1.8%); KOSPI 3,147.9 (+2.8%). However, investors’ concerns were raised due to the escalating COVID-19 crisis in India which have become the new global hotspot and pose risk of spreading to other Asian countries. Meanwhile, China’s PMI declined to 51.1 in April from 51.9 in March due to decline in new orders and exports.  

The European markets also performed well in April on the back of vaccine roll-out and economic recovery in the region. FTSE 100 6,969.8 (+3.8%); CAC 40 6,269.5 (+3.3%); DAX 15,135.3 (+0.9%). The Eurozone’s April PMI jumped to nine-months high of 53.7 from 53.2 in March on the back of pent-up demand, restocking, and investment activities. The sentiments were also supported by hopes of economic recovery.

Equity Outlook and Strategy 

We continue to be positive on equities on the back of recovery and reform stories while in terms of valuation, the Indonesia equity market is still attractive compared to peers and is a laggard in terms of YTD performance. Foreign investors turned outflow in the past 2 months due to lack of conviction as well as uncertainties surrounding the movement of US Treasury yield and COVID-19 cases globally.

From the global factors, we need to closely monitor on the COVID-19 cases around the world especially in the Southeast Asia region. Recent spike of cases in India has caused concerns among foreign investors on possible spread to Southeast Asia and Indonesia. YTD, Indonesia has shown much improvements in terms of COVID-19 conditions as infection rate has fallen to about 12% from its peak at 37% while vaccination pace also started to pick up as well after the delays of Astra Zeneca vaccine shipments from India. Moreover, we need to monitor on policies from the US. Though the Fed remains dovish, market is still expecting indications of tapering coming from the Fed sometime this year albeit the tapering itself would not happen until at least in 2023. Moreover, President Biden’s recent stimulus announcement gave excitements to market as it would help stimulate growth and thus positive for the equity market.

Domestically, we need to monitor our vaccination progress and COVID-19 cases especially after the Lebaran holidays. Vaccination so far has gone well with declining number of cases. However, the holiday season tends to lead to spike in COVID-19 cases although the government has already put in bans on mudik during the period, which is hoped to help curb infections. As Indonesia is expected to receive more batches of vaccines, we think that it should help bring down active cases should the vaccination goes smoothly. The main risk may come from new variants of the virus which have spread in multiple countries.

Fixed Income

The bond market made some recovery in April as the 10-year government bond yield declined from 6.770% to 6.500%. Foreign investors booked net inflow of USD980mn to the bond market in April. The decline in US Treasury yield also dragged down the government bond yield in Indonesia and supported bond prices. The US Treasury yield fell from 1.75% to 1.63% while the USD denominated Indonesian 10-year yield (INDON31) closed at 2.31% at the end of April.

As the US Treasury declined at the start of the month, the IndoGB bond yield also followed suit. Meanwhile, march inflation also indicated a slowdown MoM due to lower car price following government’s recent incentives to the auto sector. Moreover, the Fed’s re-emphasis on dovish policies and Powell’s commitment to act should inflation go beyond tolerable level added pressure to the US Treasury yield and gave support to the bond market. Hence, we saw more foreign inflows coming in towards the middle of the month while bond auctions also showed some recovery in demand.

The Ministry of Finance’s announcement to cut the final income tax for bonds from 20% to 10% starting in August for both domestic and foreign investors blew more positive sentiments to the bond market. March trade balance was reported at a surplus of USD1.6bn driven by strong commodities exports amidst rising imports due to oil imports while Bank Indonesia maintained its policy rate at 3.50% in April. The Ministry of Finance also reported budget deficit of 0.82% of GDP as of 1Q21 with financing also on-track at 27.9% of FY2021 target. Meanwhile, S&P and R&I maintained Indonesia’s sovereign rating at BBB/negative outlook and BBB+/stable outlook respectively. S&P mentioned that it may revise up the outlook to stable if the net external indebtedness fall below annual current account receipts, budget deficit falls below 3.0% of GDP over the next 1-2 years, net government debt falls below 30% of GDP, or government interest expense falls below 10% of annual revenue. During the FOMC meeting, the Fed maintained its policy rate close to zero and indicated no plans for tapering.

In terms of issuance, the government saw improvements auction demand during the month. As of April, the government managed to issue about IDR481.3tn of bonds YTD. All-in-all, YTD bond issuance has reached 31.4% of the government’s FY2021 issuance target. As of end of April, foreign ownership of IDR government bond has reached IDR961.3tn, or 22.8% of total outstanding amount.

Fixed Income Outlook and Strategy 

Recent decline in the US Treasury yield has helped the bond market in the past one month. However, market remained concerned on inflation and, hence, would likely keep the US Treasury yield to be volatile in the next few months. President Biden’s recent stimulus announcements also lead to questions on financing plans, which at the moment is expected to be using taxes through tax rate hikes. Treasury secretary, Janet Yellen, mentioned before that she plans to avoid using debt as it may further push up the US Treasury yield. Hence, financing execution for the stimulus need to be monitored along with the Fed’s statements during FOMC meetings.

The government recent reduction of issuance target in 2Q21 gave support to the bond market as it would reduce bond supply risk. Meanwhile, the strong 12.5% YoY FDI growth in 1Q21 also give hope for an overall stronger investment flows for the year. Moreover, plans for tech companies listing in the stock market later on during the year would also help bring in foreign flow into the Indonesia capital market.

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DISCLAIMER

INVESTMENT IN MUTUAL FUND INVOLVES RISK. PRIOR TO DECIDING TO INVEST, PROSPECTIVE INVESTORS MUST READ AND UNDERSTAND THE FUND PROSPECTUS. PAST PERFORMANCE DOES NOT GUARANTEE / INDICATE FUTURE PERFORMANCE.

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