Monthly Market Commentary - January 2022

07/02/2022
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Macroeconomics

Indonesian government extended the PPKM status amid rising covid cases due to omicron. The government reduced the quarantine period for overseas traveller that have completed its vaccination to 5 days (from 7 days previously). The booster vaccination has started with 5 vaccine brands for booster: Coronavac, Pfizer, AstraZeneca, Moderna and Zifivax. Booster shot to be prioritized for elderly and high-risk group. The booster shot will be free of charge for everyone with requirement of 6 months period after the second dose. Jakarta was the forefront battle ground for omicron as the daily infection rate has increased to 17.9% while ex Jakarta was at 4.8%. The 7DMA daily covid cases by the end of Jakarta rose to 9,152 as compared to 187 at the end of December 2021.

December inflation recorded at +0.57%MoM resulting FY21 inflation of 1.87%YoY, below BI's lower inflation target range of 2%. Food prices was the main contributor to Dec. inflation with 0.41ppt contribution. The government released preliminary number FY21 fiscal realization. Fiscal revenue increased by 22%YoY while expenditure increased by 7.4%YoY, as a result fiscal deficit was recorded lower at 4.65% vs initial target of 5.7%. Fiscal revenue was 15% above the target, the largest surplus since Asian Financial Crisis, thanks to surging commodity price. Indonesia extended luxury tax exemption (PPnBM) for automotive with pricing below Rp200mn or LCGC. The incentive will be gradually reduced per quarter and back to normal tariff of 3% in 4Q22.

Indonesia December trade surplus narrowed to USD1.02bn vs USD3.5bn in the previous month. December export increased 35.3%YoY and slightly declined MoM on slower coal export volume to China. The export number was supported by +79%YoY iron and steel export. Import jumped +47.93%YoY driven by +145%YoY oil import, pharmaceutical goods import and capital good import (machinery demand). FY21 trade balance recorded at USD35.3bn which was the largest since 2007.

Indonesia 4Q21 total investment recorded an increase of 12%YoY and FY21 realization booked at Rp901tn (100% of government's target). FDI growth rebounded to +9%YoY in 4Q21 from -4% decline in 3Q21. Primary sector was the main driver (+75%YoY) due to high commodity price. FDI in manufacturing sector booked 11%YoY increase from base metal, leather & footwear, and pharmaceutical investment. FY21 FDI grew by 8% supported by Europe, ASEAN ex Singapore, and USA. DDI grew by 15%YoY in 4Q21 and +8% FY21. The DDI growth was concentrated in manufacturing and export-oriented sectors, i.e. base metal, rubber, mining and forestry.

BI kept policy rate unchanged at 3.5% for the 11 consecutive months. However, the central bank is normalizing its policy by gradually increasing the reserve ratio requirement to 5% in March 22, 6% in June 22 and 6.5% on September 22. Indonesia December consumer confidence index inched to 118.3 vs 118.5 in November.

Equity

Local Market

JCI increased by 0.8%MoM with around Rp 6tn net foreign buy in all market. The index outperformed the global peers as foreign investors were looking for an alternative market (with undemanding valuation) amid tightening and high inflation condition in the global market. Many perceived that Indonesia macro to benefit from high commodity price and the structural changes. IDXEnergy (+13.6%) was the best performing sector on elevated coal price and prolonged winter in many countries. The performance was also attributed to coal companies plan to engage in renewable energy business. IDXFinancial and IDXHealthcare were the second-best performer that benefit from the foreign flow and defensive pick amid rising covid case. The worst performer was IDXTech on rising interest rate environment.

Global Market

DJIA 36,338.3 (-3.3%); S&P 500 4,766.18 (-5.3%); NASDAQ 15,644.97 (-9.0%). The market fell sharply after the fed sent more hawkish tone to reduce the overall asset holding. Investors reacted negatively with the upcoming 3 tightening i.e. faster tapering, potential rate hike increase, and balance sheet reduction. The fed has about USD 8.8bn in the balance sheet. Tech and growth stocks were badly hit as their cost of borrowing may increase. Investors switched to value and cyclical name. US December inflation recorded at +7%YoY (in line with consensus expectation) and at the fastest pace in the past 40 years. US 4Q21 GDP grew by 6.9% better than expectation of 5.5% growth. The stronger growth was attributed to higher consumer activity on consumption, export, business spending. US FY21 GDP recorded at +5.7% which was the strongest since 37 years ago. The technology names rebounded on the last trading day of the month, but they still booked a steep monthly decline.

NIKKEI 28,791.71 (-6.2%); Hang Seng 23,397.67 (+1.7%); Shanghai Comp 3,639.78 (-7.6%); Straits Times 3,123.68 (+4%); FTSE Malay KLCI 1,567.53 (-3.5%); KOSPI 2,977.65 (-10.6%). HSI outperformed its peers with tech and property stocks leading the rally. The People's Bank of China cut the one-year loan prime rate by 10bps to 3.7% and reduced the 5-year loan prime rate by 5bps to 4.6%. PBOC also cut the policy rate of its medium-term lending facility (MLF) by 10bps to 2.85%, the first cut since April 2020, to boost the economic growth. The other Asian market fell after the Fed signalled a rate increase on the next meeting with technology names led the decline. South Korea saw a significant spike in daily covid cases of more than 15k vs 7DMA of 5k at the end of December 2021. Singapore GDP grew by 7.2% FY21, rebounded from -5.4% FY20.

FTSE 100 7,384.54 (+1.1%); CAC 40 4,153.03 (-2.2); DAX 15,884.86 (-2.6%). At the beginning of the month, European stocks hit a record high supported by airline and travel stocks. The stocks turned south on stubbornly high inflation. Higher borrowing cost has pushed German 10-year bond yield traded in positive territory; the first time since May 2019. The geological tension between Russia and Ukraine exacerbated the situation as US and UK have threatened for economic sanction should Russia invade Ukraine. France GDP grew by 0.7% in 4Q21 bringing FY21 growth of 7% while German economy contracted by 0.7% in 4Q21 due to mobility restriction amid rising covid cases.

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. We are starting to see covid cases climbing up again in Indonesia along with the global Omicron outbreak. Hence, we must remain cautious and make sure that the condition does not worsen again. We think that strict border control may help prevent large scale mobility restrictions and, hence, avoid economic downturn. Inflation and tightening policies are risks for 2022. The equity has not been moving much YTD despite getting some foreign inflow thus valuation still the same and lags peer countries. As economy continues to reopen, we expect corporate earnings should improve. Omicron outbreak is a short term risk but the government is expected to be not as restrictive as compared during the Delta outbreak in terms of mobility restrictions as the Omicron is less severe than Delta. Series of mega projects such as the Kaltara industrial estate, government infrastructure projects, and newcapital city may boost loan demand. We also expect commodity prices to remain strong at least until the first half of the year. However, purchasing power is still lukewarm as the mid-to-high end consumers are still driving spending while the mid-to-low is still on saving mode. Risk on growth would come from covid, inflation, and geopolitics uncertainties.

Historically, EM has been more reactive should there be monetary tightening globally at the same time while the pressure is less severe should the Fed tighten policies by itself. So far, we have seen the UK and Australia tightened its monetary policies while China and EU are still behind. However, the Fed recently announced a more hawkish signal saying that the central bank may raise rate by 100bps in 2022 starting in March to curb the aggressive inflation. We do not expect stagflation as demand remains strong particularly in the US, hence, despite the high inflation, growth would remain solid. Thus, in current environment, fundamental driven stocks would flourish more than the future value driven tech stocks. We have seen blue chip names performed well YTD compared to the small cap ones which was also supported by the foreign fund flow into the equity market. Hence, we expect the trend to continue as policy normalization continues worldwide.

Fixed Income

Indonesia 10 years government bond yield rose 6bps to 6.44% compared to the previous month. In comparison, the US 10-year treasury note increased by 26bps to 1.77%. The fed gave a clear guidance that it will soon increase the FFR as inflation is above 2% and labour market is strong. The bond buying program will be lowered to USD30bn in Feb and ends in March at the same time with rate increase (the fed does not have meeting in Feb). The Fed also highlighted its balance sheet reduction (total B/S size is around USD 9tn) plan that will take some time in orderly and predictable manner. Based on DMO bond flow data as of 28 January, foreign ownership in bond accounted for 19% of total outstanding. The foreign investors posted an outflow of Rp4.1tn YTD 2022. Indonesia 10 years USD global bond yield at 2.68%. IDR depreciated by 0.9% MoM vs USD to 14,383.

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. We think local investors will be the main supporter of IndoGB in the near term while foreign investors would be in defensive mode as US Treasury yield climbs up. 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 21% would limit downsides in the bond market while high real yield and low inflation in Indonesia continues to attract foreign investors. Additionally, the government’s plans to trim down issuance and buyback some bonds would also help reduce supply risks while liquidity remains ample. Hence, should market get corrected, foreign investors may look to re-enter at attractive entry points.

The Fed recently signaled rate hike of 100bps this year starting in March. Historically, the correlation between EM underperformance and central bank tightening is strong but only if the tightening happens globally and not just the Fed. Australia and the UK have tightened ahead but we have not yet see EU and China following. We expect to see the Fed conduct balance sheet reduction in the next 2 years. Rising US Treasury yield while real yield normalizes to positive territory this year may also bring up EM sovereign bond yield. Hence, we would need to monitor the US Treasury yield along with Fed’s policies. At the moment, Bank Indonesia does not need to aggressively increase rates as the US does as differential with FFR is still wide. If the government’s reforms goes well and efforts on the metal mining industries does create positive structural change to the economy, then it may give support to keep bond yield manageable.

 

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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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