Monthly Market Commentary - June 2022

07/07/2022
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Macroeconomics

Indonesia 5M22 budget surplus widened to Rp132.3tn (+0.74% of GDP) vs Rp 103.1tn in the 4M22. State revenues grew 47.4% YoY to Rp 1,070.4tn reaching 58% of FY22 target. Strong revenue collection was contributed by higher commodity prices and recovering economic activities. Government spending contracted by 0.8%YoY to Rp 938.2tn and accounted for 34.6% of FY22 target.

May trade surplus recorded at USD 2.9bn which was lower than market expectation of USD 3.83bn. Export grew at 27%YoY which was the softest growth in the past few months due to less working days during the Hari Raya festivity and CPO export ban. Import rose 30.7% on stronger domestic demand.

Indonesia May CPI increased 0.4%MoM (vs +0.95%MoM in the previous month) translating to +3.55%YoY. Core inflation was stable at 2.58%YoY. May inflation was driven by food and transportation prices due to seasonal Hari Raya festivity. Food prices contributed 0.2ppt to May inflation while transportation contributed 0.08ppt.

BI kept the interest rate unchanged at 3.5%. BI expected the current account will record a surplus in 2Q22 and FY range target a deficit of 0.5-1.3%. Economic growth and inflation forecast were kept at 4.5-5.3% and 2-4% respectively.

The government increased electricity tariff for usage of >3,500 VA by 17.6% to Rp1,699.5/kwh. The tariff increase was targeting around 2.4mn customers or 3% of total electricity subscribers. Indonesia May consumer confidence index jumped to all times high at 128.9 as covid cases remained low and economic activities improved. The world bank cut FY22 global growth forecast to 2.9% from earlier estimate of 4.1%. The geopolitical tension in eastern Europe and high inflation were the culprit for the modest growth.

Equity

Local Market

JCI declined by 3.3% in the past one month with around Rp 7.5tn net foreign sell. JCI was gaining at the beginning of the month and nearing its all times high level. Local investors took profit as the index was close to its all times high and preferred to wait on the sideline ahead of US inflation data. Foreign started to take profit once IDR depreciate against USD ahead of BI policy meeting. Investors remained cautious on global growth slow down and higher inflation on the horizon. IDXTransportation (-15.1%) was the biggest laggard as investors continued profit taking after its strong rally. IDXBasicMaterials (-12.9%) dragged the index with metal mining names corrected of softer commodity prices. IDXFinancials (-6.6%) was under pressure along with foreign outflow on the banking counters.

Global Market

DJIA 30,775.43 (-6.7%); S&P 500 3,785.38 (-8.4%); NASDAQ 11,028.74 (-8.7%). The US indices corrected due to a combination of higher inflation and policy rate hike. US May inflation report showed a higher figure than the street’s expectation. US may inflation accelerated to 8.6%YoY from 8.3% reading in the previous month; the core CPI increased 6%YoY. The Fed increased rate by 75bps to combat inflation and investors were worried that the tightening might cause economy growth to slow down or driving the economy into recession. The Fed cut its FY22 GDP projection to 1.7% from 2.8% earlier. US CB Consumer confidence index fell to 98.7 vs pervious reading at 106.4. Growth stocks were hit the most while some investors rotated into defensive consumer names.

NIKKEI 26,393.04 (-3.3%); Hang Seng 21,859.79 (+2.1%); Shanghai Comp 3,398.62 (+6.7%); Straits Times 3,102.21 (-4.0%); FTSE Malay KLCI 1,444.22 (-8.0%); KOSPI 2,332.64 (-13.2%). The Chinese markets outperformed its peers as the cities gradually lifted mobility restriction as covid cases went lower. China June Manufacturing PMI improved to 50.2 (highest reading in the past 4 months) from 49.6 in May as mobility restriction eased. Consumer confidence in the region dropped with South Korea June consumer confidence index decline to 96.4 vs 102.6 in the previous reading. Japan June consumer confidence index fell to 32.1 vs 34.1 in May reading. Japan kept the rate unchanged and  continued its loose monetary policy, which can caused Yen to slide.

FTSE 100 7,169.28 (-5.8%); CAC 40 5,922.86 (-8.4%); DAX 12,783.77 (-11.2%). Eurozone May inflation recorded at 8.1% (a seventh consecutive record high) driven by energy and food prices. Eurozone May manufacturing PMI softened to 54.6 from 55.5 in the previous month. ECB to hike interest rate (first time since 2011) by 25bps on the next July meeting and might potentially increase again on the next September meeting depending on the trajectory of the inflation rate. The Bank of England hiked rate for the consecutive fifth time by 25bps to 1.25%. BoE expected the inflation to rise to above 11% in October on higher food and energy cost. The Swiss National bank unexpectedly hiked 50bps, the first time since 2007, due to inflation risk. Investors were turning cautious on the possibility of recession in the region.

Equity Outlook and Strategy 

We remain 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. 

We started to see some foreign fund outflows in the previous month due to global macro shake ups after inflation continued to spike up in the US and, thus, prompting the Fed to be more aggressive in rate hikes. However, the foreign outflow has been light and got balanced out with some inflows now and then. Hence, YTD foreign fund flow is still a large inflow. Though some foreign investors have considered taking profits from Indonesia, they are still left with limited choices for markets they find attractive enough to reallocate their fund to. Elevated commodity prices and expectation of strong 2Q22 GDP should remain as catalysts for Indonesia equity. Thus, foreign investors are still holding on to Indonesia.

We think that risks in Indonesia may come from inflation which may start to increase in coming months. Overshooting inflation may cause disruptions to economic recovery and growth as well as causing panic just as it did in the US. Risk of recession in developed countries could also pose as risk to Indonesia equity. Should consumption get hit in developed countries, there may be pressure coming to commodity prices which would hurt the Rupiah and Indonesia’s macro stability if domestic demand does not pick up. As government is also actively pursuing growth in tax revenue, we think that growth may also be at risk if consumers are overly hit by taxes. Lastly, we have seen strong foreign inflow coming in from China since late 2021. As China start to show improving PMI and garners more interests from foreign investors, there may be risks of foreign fund flow reversal back to China should conditions continue to improve in China. Hence, we need to be vigilant and continue to monitor the market.

Fixed Income

Indonesia 10 years government bond yield increased 18bps to 7.22% compared to the previous month. In comparison, the US 10-year treasury note increased by 16bps to 3.013%. The Fed increased the rate by 75bps to a range between 1.5-1.75% (highest hike since 1994). The Fed highlighted that the central bank might increase the rate by a similar magnitude on the next meetings depending on the data and economic outlook. New dot plot projection showed federal fund target rising to 3.4% by year end vs earlier expectation of 1.9% in March. The Fed increased the inflation outlook to 5.2% from 4.3% earlier. Based on DMO bond flow data as of June 28, Foreign ownership recorded at 16.1% of the outstanding and outflow of Rp112.4tn YTD. Indonesia 10 years USD global bond yield at 4.48%. IDR depreciated by 2.2% to 14,898.

Fixed Income Outlook and Strategy 

Higher inflation and rising interest rates would pressure the bond market. In addition, the current tension in Ukraine may push up commodity price and inflation. 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. 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 16% 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.

In the past month, the bond yield has been volatile as many investors trade on momentum out of concerns on long term outlook on the bond market due to expectations of rising inflation and interest rate. Foreign investors are still risk-off due to concerns on understated inflation. However, we think that market’s concerns on inflation have already been reflected as shown by the uptrend in bond yield and massive foreign outflow YTD. Hence, we think that downside in the bond market should already be limited at this juncture. However, we are waiting for the best entry point into the market as the Fed continues to sound hawkish in its statements.

 

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This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document 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. Information herein is believed to be reliable, but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  PT Schroder Investment Management Indonesia, 30th Floor IDX Building Tower 1, Jl. Jend. Sudirman Kav 52-53, Jakarta 12190, Indonesia. PT Schroder Investment Management Indonesia is licensed and supervised by Indonesia Financial Services Authority (OJK).

Read full reportJune 2022 - Monthly Commentary-WEB-updated
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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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