Monthly Market Commentary - February 2022

09/03/2022
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Macroeconomics

Indonesian government extended the PPKM status and mentioned that covid cases has been plateauing in some cities. On the second week of the month, the government increased the PPKM status to level 3 for Jabodetabek, Jogja, Bandung and Bali PPKM due to low tracing. MoH urged citizen not to panic as the number of hospitalized patients was still under control. The PPKM level 3 restrictions are: Supermarket and mall can open until 9pm with 60% capacity, children that have received first dosage of vaccination are allowed visiting mall, movies capacity at 60% max, place of worship capacity is limited to 50%. The government reduced the quarantine period for overseas traveller that have completed its vaccination to 5 days (from 7 days previously). The 7DMA daily covid cases by the end of February was at 47,503 vs the peak at 55k level.

January 2022 inflation booked at 0.56%MoM / +2.18%YoY. January inflation was attributed to higher food prices, housing, and equipment. Cooking oil contributed 0.30 ppt to inflation in the past 12 months as CPO price continued to surge. The contribution may decline in the coming month as government has placed a price ceiling for cooking oil, i.e. Rp11,500/litre for bulk cooking oil, Rp13,500/litre for branded cooking oil, and Rp14,000/litre for premium cooking oil.

Indonesia 4Q21 GDP recorded at 5.02%YoY vs +3.5%YoY growth in 3Q21. Private consumption recovered to +3.6%YoY vs +1%YoY in 3Q as covid cases declined and mobility improved. Government spending increased 5.2%YoY and provided a support to economic growth as well. Net export remained solid on high commodity price. On sector wise, strongest rebound were seen in transportation, accommodation, F&B services and manufacturing sector.

BI kept the interest rate unchanged at 3.5%. BI saw that the decision was needed to maintain stability of inflation, exchange rate and accelerating economic recovery. The central bank further informed that the policy rate will be kept low until inflation started to rise more sharply, which may happen in 3Q22. BI's macro forecast for this year: Inflation range of 2-4%, GDP forecast of 4.7-5.5%, and CAD of 1.1-1.9% of GDP. January FX reserved declined by USD 3.6bn to USD 141.3bn due to public debt service and lower banking placement in BI's FX instrument. The lower banking placement in BI might be attributed to lower export value due to several weeks coal export ban in January.

Indonesia January trade balance recorded a surplus of USD 0.93bn vs USD 1bn in the previous month. Export growth decelerated to +25.3%YoY vs +35%YoY in December 21 due to January coal export ban. Import grew 36.7%YoY driven by capital goods which was dominated by machinery; signalling an continuous economic recovery. Oil and gas import decelerated vs in December as stockpiling activities has normalized.

Indonesia booked a Current Account Surplus of USD3.3bn FY21 or a surplus at 0.3% of GDP; the last surplus was in 2011. The trade surplus jumped to USD44bn supported by surge in export from higher commodity prices and economic growth in main trading partner countries (China, US and EU). The financial account recorded at USD11.7bn FY21. The portfolio investment turned negative in 4Q21, after 4 consecutive quarterly inflow, due to outflow in bond market and absence of global bond issuance in 4Q21. Overall, the FY21 BOP reached USD15.1bn which was the highest since 2014.

Indonesia January budget realization recorded at Rp28.9tn or +0.16% of GDP (the first monthly budget surplus since 2014). Revenue jumped +54.9%YoY, reaching Rp156tn or 8.5% of FY22 target. Tax revenue rose 66%YoY which was driven by economic recovery momentum (higher VAT and income tax) as well as high commodity prices. Spending contracted by 13%YoY to Rp127.2tn. Social spending decreased by 83%YoY as economy normalize while energy subsidy increased 347%YoY on high oil price and rising demand.

Russia-Ukraine tension escalated to a new level after President Putin recognized Donetsk and Luhansk independency, allowing Russian peacekeeping forces to enter the regions that was in border with Eastern Ukraine. The west regretted and condemned the move as the act of recognizing the separatist movement in Ukraine was a violation of international law. President Bidens signed an executive order that prohibited new investment, trade, and financing by US person to Donetsk and Luhansk. UK also joined to sanction Russia by targeting 5 Banks and 3 high net worth Russian. Germany halted certification of the Nord Stream 2 gas pipeline that brings natural gas from Russia to Europe. Russia launched a special military operation in Ukraine on Thursday, 24 Feb 2022; claiming the objective was demilitarization and denazification.

Equity

Local Market

JCI increased by 3.7%MoM with around Rp 17.4tn net foreign buy in all market. The index outperformed the global peers as foreign inflow has pushed the index into all times high level. Indonesia’s equity valuation was undemanding, macroeconomic condition was solid, and the country was benefitted from higher commodity price. Almost all sector ended the month in positive territory with exception from IDXHealth (-1.8% as covid situation was under control) and IDXNonCycilical consumer (-1.4% due to concern on raw material input cost from higher soft commodity price). The best index performer was IDXInfrastructure (+8.7%) driven by a tower company. IDXFinance and IDXIndustrial were gaining around 4% WoW from foreign inflow.  

Global Market

DJIA 33,892.6 (-2.4%); S&P 500 4,373.94 (-1.3%); NASDAQ 13,751.4 (-0.1%). It was a rollercoaster month as the US stocks started the month in positive mood on strong corporate earnings and outlooks. The stocks declined and US treasury yield spiked above 2% after US January inflation recorded the highest in the past 40 years. The stocks went deeper after Russia launched a special military operation in Ukraine. Some buyers came at the end of the month seeing many of the stocks were oversold but the indices still booked negative monthly performance. Non-Farm Payroll increased 467k in January (vs Wall Street's estimate of 150k job addition). The labor participation rate improved to 62.2% amid high covid cases. US February PMI increased to 56 vs 51.1 on the previous month

NIKKEI 26,526.82 (-0.7%); Hang Seng 22,713.02 (-3.6%); Shanghai Comp 3,462.31 (+3.0%); Straits Times 3,242.24 (-0.1%); FTSE Malay KLCI 1,608.28 (+5.8%); KOSPI 2,699.18 (+1.3%). The Asian market mixed as investors assessing the geopolitical tension in eastern Europe. There was another headwind on the Chinese tech stocks after its authorities told SOE firms and banks to report their business exposure with Ant Group co. China also issued guidelines for food delivery platforms to lower the existing fees. India banned 54 Chinese apps (among them are Tencent, Alibaba, NetEase) due to security concern. China January inflation fell to 0.9% vs 1.5% in December 2021. Food price decline was the main contributor of slower growth as the non-food inflation remain flattish. Bank of Korea kept the interest rate unchanged at 1.25% and predicted inflation to run above 3%. India’s central banks kept the rate unchanged. Japan 4Q21 GDP grew 1.3% QoQ after 0.7% correction in 3Q21. Malaysia market outperformed as they are a net exporter for oil.

FTSE 100 7,458.25 (-0.1%); CAC 40 6,658.83 (-4.4%); DAX 14,461.02 (-5.6%). Bank of England increased rates by 25bps, in line with market expectation. The back-to-back policy rate increase since December 2021 was caused by high inflation (energy cost, demand recovery and supply chain issues) and strong labour market. ECB kept the interest rate unchanged at 0% despite a record high January inflation of 5.1%. The European stocks have been reporting their earnings and majority reported a stronger growth in the 4Q21. In the middle of the month, the stocks trimmed some of the gain, after high January inflation data reported in US. EU raised the inflation forecast to 3.5% FY22 before coming down to 1.7% in 2021 on supply disruption and energy crisis. The geopolitical tension gave another pressure to the stock market.

Equity Outlook and Strategy 

We are positive on equities as valuation compared to peer equity markets remains attractive while the fundamental reform story remains intact. Potential listings of new economy stocks in the pipeline would also help attract flow into the equity market. However, we are cautious in the short term due to risk form the Ukraine-Russia tension. Covid cases remains high in Indonesia though with lower hospitalization and mortality rates compared to during the Delta outbreak. We have also started to see Jakarta passing the peak of infections. Government’s stance seems to also be heading towards continuation of reopening and economic recovery.

All eyes have now shifted to the Ukraine-Russia tension as Russia initiated an attack on Ukraine towards the end of February. We have seen commodity prices rallied in response to the tension including crude oil, coal, nickel, and many others. Historically, geopolitical tension’s impact to the market is usually short lived. However, the indirect impact from elevated commodity prices may linger. As Indonesia is an exporter of commodities including CPO and coal, the country should be among the beneficiaries of elevated commodity price. However, we note that Indonesia is also an importer of oil, hence, an overshoot in oil price may be negative if not neutral to the trade balance and current account. Additionally, high commodity prices may also translate to higher inflation and could pose risk to purchasing power. High soft commodity prices may also pose risk on consumer companies’ margins. Hence, we would need to continue to monitor the development in Ukraine as well as the commodity prices. The biggest risk is if a prolonged war could deter growth and, hence, resulted to stagflation.

Despite the situation in Ukraine, foreign investors continued to post sizeable inflow into the Indonesian equity market. We think that the economic recovery in Indonesia, high commodity exports, and lagging valuation has somewhat make Indonesia attractive in the eyes of foreign investors. The government’s stance in continuing to ease mobility and border restrictions is also seen as positive by foreign investors. We think that due to high inflation level in the US, the Fed would not postpone its planned rate hike. 

Fixed Income

Indonesia 10 years government bond yield rose 5bps to 6.52% compared to the previous month. In comparison, the US 10-year treasury note increased by 4.7bps to 1.83%. US treasury yield spiked above 2% in the middle of the month after US January inflation reported at +0.6%MoM or +7.5%YoY (highest since 40 years ago) and well ahead of consensus revised up inflation forecast at 7.3%. Energy, used vehicle, shelter, and food cost were the main contributor to the inflation. St. Louis Fed Reserve bank stated his support of 1% FFR hike by the end of July to combat inflation. The yield declined at the end of the month as investors returned to safe heaven due to higher tension in eastern Europe. Based on DMO bond flow data as of 24 February, foreign ownership in bond accounted for 18.8% of total outstanding. The foreign investors posted an inflow of Rp4.6tn YTD. Indonesia 10 years USD global bond yield at 2.91%. IDR vs was flat at 14,367.

Fixed Income Outlook and Strategy 

Higher inflation and rising interest rates would pressure the bond market. Monetary policy reversal and hefty valuation would limit upside to the bond market at this juncture. In addition, the current tension in Ukraine may push up commodity price and inflation. One risk is the fact that banks may start to grow their loan once again as the economy recovers, hence, reducing the needs for them to keep government bonds as reserve. We think that low foreign ownership of government bonds at about 19% would limit downsides in the bond market while high real yield and low inflation in Indonesia continues to attract foreign investors. Hence, should market get corrected, foreign investors may look to re-enter at attractive entry points. 

Just as the equity market, prolonged war and stagflation may also pose risk to the bond market driven by higher commodity prices. As we have yet seen spike in Indonesia inflation YTD, risk from inflation overshoot remains as a threat. We would need to monitor government’s coordination with Pertamina on potential fuel price hike if any. Currency pressure is another potential risk to the bond market though the Rupiah remained tamed at this juncture likely due to low foreign ownership in government bonds and stronger external macro conditions. Local investors tend to be resilient and less sensitive to market related pressure and likely to continue as the supporter of the bond 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.

The views and opinions contained herein are those of the author(s) on this page and are not necessarily represent views expressed or reflected in other Schroders’ communications, strategies or products. This material is intended to be for information purposes only and is not intended as promotional material in any respector offer or solicitation for the purchase or sale of any financial instrument. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations [and also may not be circulated, published, reproduced or distributed to any other person without our prior written consent]. Reliance should not be placed on the views and information in this material when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can goes down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Some information quoted herein was obtained from external sources we consider to be reliable. Information herein is believed to be reliable, but Schroders does not warrant its completeness or accuracy. No responsibility both directly and indirectly can be accepted for errors of fact obtained from third parties or negligence of or loss resulting from the use of this material. The data disclosed in this material may change according to market conditions. If any regions/sectors are shown in this material, such data is for illustrative purposes only and should not be viewed as a recommendation to buy/sell. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know and include some forecasted views. However, there is no guarantee that any forecasts or opinions disclosed in this material will be realised. These views and opinions herein are our current views and may change without notice. Nevertheless, this disclaimer does not exclude any duty or liability that Schroders has to its customers under the prevailing laws and regulations in the Republic of Indonesia. PT Schroder Investment Management Indonesia, 30th Floor Indonesia Stock Exchange Building Tower 1, Jl. Jend. Sudirman Kav. 52-53, Jakarta 12190, Indonesia. PT Schroder Investment Management Indonesia as an Investment Manager is licensed and supervised by the Indonesian Financial Services Authority (OJK).

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