Quarterly Market Recap & Commentary 3Q 2023

In 3Q23, JCI posted a return of 4.17% QoQ with net inflow of US$5.8m. Meanwhile, Indonesian bonds recorded a notable foreign outflow of US$857m in 3Q23, the first net outflow in the past three quarters. Investors continued to focused on Rupiah stability considering recent volatility, while external sentiments include Fed’s outlook where they will likely keep the interest rate “higher for longer” still lingers and domestic consumption that has been quite sluggish for the first half of 2023.

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President Jokowi signed the revised regulation on export proceeds (DHE), (PP No.36/2023), replacing PP No.1/2019 and the regulation become effective on 1 August 2023. With this new regulation, gov’t expects export proceeds repatriation could reach US$40-50bn/year. Exporter with minimum export value of $250K is obligated to retain 30% of the amount, for 3 months and create an escrow account in Indonesia Eximbank (LPEI), who will manage the export proceed.

The Health Omnibus Law was passed on Jul 11th 2023 by the parliament, with key changes aimed at increasing the supply of doctors, both from foreign & domestic pools and the improvement of efficiency of healthcare spending.

Indonesia’s ministry of investment posted investment realization of IDR350tn in 2Q23, +14.2% YoY (Q1: +20.2%). Foreign investment accounted for 53% while the rest is domestic.  Logistics, transports, warehouse and basic metal non-machinery are top two invested sectors.

Indo GDP 2Q23 posted an increase of 5.2% YoY, above market consensus of 5%. This was driven by higher household consumption (+5.2% YoY), Govt. spending (+10.6% YoY), and FA investment (+4.6%) as net export gradually normalizes. Indonesia's trade surplus dropped to USD 1.31 billion in July 2023 from USD 4.22 billion in the same month of 2022, and below forecasts of a surplus of USD 2.53 billion. Exports continued to trend down with an 18.0% YoY contraction in July while imports were stronger with a smaller 8.3% YoY contraction.

Indonesia booked a Current Account deficit of US$1.9bn (0.5% of GDP), lower than US$3bn surplus (+0.9% of GDP) in 1Q23 and consensus of US$268mn (0.1% of GDP) due to the normalization of external trade given softer commodity prices & strong import.

BI introduced Sekuritas Rupiah Bank Indonesia (SRBI) as a pro-market monetary operation (contraction) instrument that will use rupiah-denominated government bonds as underlying assets. The first auction of SRBI scheduled to be held on 15 Sep 2023 and can be traded in the secondary market by banks and can be owned by non-bank participants.

Indonesia’s industrial confidence index (IKI) in August 2023 recorded reaching 53.22, marked a slight slowdown from July 2023 at 53.31. This decline was caused by falling commodity prices. 

Indonesia’s FX reserves slightly declined by US$0.6bn or 1.3% MoM in August 2023 to US$137.1bn, from Rupiah stabilization needs and foreign capital outflows (US$1.3bn net foreign outflow on stocks and US$0.5bn in bonds).

The government increased the state revenue target by Rp21tn to Rp2,781tn and expenditure target by Rp21tn to Rp3,325tn in the 2024 Draft State Revenue and Expenditure Budget (RAPBN). Gov’t targeted an additional increase in the tax revenue and non-tax revenue target by Rp2tn to Rp1,989tn and by Rp19tn to Rp492tn respectively. Additional state spending is allocated for ministry and institutional spending of Rp3.8tn, energy subsidies Rp3.2tn, fuel and electricity compensation Rp10.1tn, and education reserves Rp3.9tn.

Indonesia Manufacturing PMI fell in September 2023 to 52.3 from 53.9 in the previous month, driven by eased production though still at a solid rate. Bank Indonesia recorded that the Retail Sales Index (IPR) in August 2023 was at 204.4, grew 0.5% MoM, improving after contracting -8.9% MoM in June 2023. The driver for this increase was mainly seen in the food, beverage and tobacco group and also in the spare parts and accessories group. Indonesia posted an August trade surplus of $3.12 billion (up sharply from $1.31 billion in July 2023). Export plunged 21.21%  from August 2022 to USD 22 billion amid moderating commodity prices and imports fell 14.77% YoY to USD 18.88 billion, amid weakness in the Rupiah.

Bank Indonesia maintained the BI7DRRR at 5.75% in September meeting, in line with consensus and marked the eighth consecutive time on hold. The monetary policy continues to prioritize the stability of the rupiah exchange rate as a proactive measure against any potential adverse effects from global financial market uncertainties given controllable inflation of 3.3% in Aug 2023.

The state budget continued to record a surplus, at 0.7% of GDP or Rp147.2tn in Aug 2023, marking the eighth  consecutive surplus this year. Revenue growth eased to 3.2% YoY from 4.1% YoY affected by both tax and non-tax receipts. Expenditure growth was flattish at 1.1% YoY from 1.2% YoY in the previous month.

Bank Indonesia recorded loan growth of 9.06% YoY in Aug 2023 from 8.54% YoY in the previous month. Bank Indonesia expects the loan growth to be in the range of 9-11% this year.

Bank Indonesia recorded that the number of corporations placing its export proceeds in BI’s term deposit (TD DHE) reached 122 corporations in Sep 2023 and marked an increase compared to 50 corporations in the previous month. Export proceeds coming in to BI’s term deposit for export proceeds reached US$1.3bn in August-September, with majority was within 3-months tenor.


US equities were weaker in Q3 with DJIA 33,507.5 (-2.62%); S&P 500  4,288.05 (-3.65%); NASDAQ 13,219.32 (-4.12%) QoQ. US equities wrapped up July quite strong as inflation continued to be cooling and US economy remained to be resilient. The US economy expanded 2.4% QoQ in 2Q23 (prev/ cons: 2%/1.8%). US initial jobless claims dropped by 7k to 221K (prev/cons: 228K/235K), lowest in five months. US consumer confidence rose to 117 in Jul 2023 (prev/cons: 110/112). Real personal spending expanded by +0.4% in Jun-23 from flat in the previous month. In the month of August, US indices plunged as the market was clouded by Powell’s speech during Jackson Hole symposium on the Fed’s possibility to rise the interest rate if economic data show no sign of slowing down and keep the inflation target unchanged of 2%.  The unemployment rate ticked higher to 3.8% in August 2023, reaching its highest level in more than a year and better than expectation to remain at 3.5%. On the last FOMC meeting in September 2023, The Fed kept rates unchanged as expected by consensus, while signalling the ‘higher for longer’ narrative with one more hike this year and less cuts in 2024. The economy has proven to be stronger than expected as a result of the ongoing strength of the consumer. The FOMC’s economic projections now show the median expectation for GDP growth this year at 2.1% (previously 1.1%) and next year at 1.5% (previously 1.0%), while the new dot plot now projects FFR at 5.1% by YE-2024 (previously: 4.6%).

Asian market declined for the quarter with NIKKEI 31,857.62 (-4.01%) while Hang Seng 17,809.66 (-5.85%) and Shanghai Comp 3,110.47 (-2.86%) as concerns over the Chinese economy and fears over global economic growth weakened investor sentiment. However, investor saw some signs of better growth from industrial sector in June as China’s industrial production went up by 4.4% YoY from 3.5% in the previous month. From the consumption side, however, looks gloomy as retail sales growth slowed to 3.1% from 12.7% in the previous month. This was followed by market that plunged in Aug 2023 as slowdown signs were seen in the economy. China cuts the one-year loan prime rate (LPR) by 10 basis points to 3.45%, while the five-year LPR was left at 4.20%.  China maintained its LPR both for 1Y and 5Y at 3.45% and 4.2%, in line with the expectation The Purchasing Managers' Index (PMI) rose to 50.2 in September 2023 from 49.7, according to the National Bureau of Statistics. Additionally, profit at industrial firms posted quite a major increase of 17.2% jump in August 2023, reversing July's 6.7% decline. Over in Japan, the equity market demonstrated resilience during the market correction in the quarter. This correction was triggered by rising interest rates and bond yields in the US and Japan. The consumer confidence index slightly increased to 37.1 in Jul 2023 vs. 36.2 in the previous month. Retail sales accelerated by +5.9% YoY in Jun-23 from 5.7% previously. Core inflation rate slowed to 3.1% in July 2023 from 3.3% in June 2023, but still above the Bank of Japan's 2% target for the 16th straight month while the headline inflation was unchanged compared to the previous month at 3.3%. Japan’s business activity expanded in July 2023 as service sector saw a stronger expansion, with the PMI climbed to 54.3 from 53.8. The BoJ left interest rates unchanged at -0.1%, while maintaining its outlook and yield curve control policy. Japan annual inflation rate slowed down to 3.2% in August 2023 from 3.3% in the prior month, marked to the lowest reading in three months. Singapore annual inflation rate edged down to 4% in August 2023 from 4.1% in the previous month, in line with market expectations and marking the lowest rate since January last year. Main downward pressures came from lower inflation for food, household durables & services and recreation & culture.

Eurozone shares were mix in Q3 amid worries over the negative effects of interest rate rises on economic growth. FTSE 100 7,608.08 (+1.02%); CAC 40 7,135.06 (-3.59%); DAX 15,386.58 (-4.71%). However, data released at the very end of the period showed eurozone inflation slowed to a two-year low of 4.3% in the year to September, down from 5.2% in August. Eurozone business activity dropped more than expected in August as services activity contracted as output fell to a 33-month low of 47, down from 48.6 in July 2023. Economic slowdown signs continued to be seen in September with Eurozone’s retail sales decreased by 0.2% MoM (prev/cons: 0.2%/-0.1%). Eurozone’s Services PMI came lower to 47.9 in August 2023 from 50.9 in July 2023, pointing to the first decline in services activity so far this year, and the sharpest since February 202. UK’s retail sales dropped by 1.2% MoM in July 2023 (prev/cons: 0.6%/-0.5%), marked the first contraction since Mar 2023 as sales declined for both food and non-food, reflecting the impact of wet weather and cost pressures. UK economy expanded 0.2% in Q2 2023, following a 0.1% growth in the previous quarter, beating the forecast of a flat growth. Both the Bank of England and European Central Bank have indicated that they are putting rate hikes on hold as inflation nudges lower and economic weaknesses mount. Over in Germany, a preliminary estimate showed that PMI rose to 46.2 in September 2023, up from the previous month's 39-month low of 44.6 and better than the market consensus of 44.8 yet the reading indicated a reduction in private sector business activity, that mostly driven by the contraction in manufacturing output since May 2020, while only slight decrease seen in services activity. Germany business climate decreased MoM in September 2023 at 85.7 from previous of 85.8 and expectation of 85.2.

In 3Q23, JCI posted a return of 4.00% QoQ with net inflow of US$5.8m. July started off with a handful of companies reported their 2Q23 numbers and banks begin to boost loan disbursement, especially in the consumer segment. Oil and coal price started to experience a strengthening trend after being in a slump for months and oil price continued its rally until the end of September due to production cut by Saudi Arabia and Russia. Entering August, market focused on the political development in Indonesia, domestic macro and global market condition especially from the US and China, therefore foreign investors were still on their wait-and-see mode and took some profit during the quarter. Investors continued to focused on Rupiah stability considering recent volatility, while external sentiments include Fed’s outlook where they will likely keep the interest rate “higher for longer” still lingers and domestic consumption that has been quite sluggish for the first half of 2023. However, Indonesia’s fundamental economic data remains solid with real GDP growth that accelerated in 2Q23, inflation that eased in September and corporate earnings growth expectations that still expected to remain resilient this year.

Equity Strategy

Indonesia still offers solid fundamentals from both macro and corporate earnings sides as GDP and corporate earnings growth expectations are still expected to remain resilient for 2023. Indonesia is trading at a valuation of 14x which is at a discount compared to peers such as the US, Japan, or even India. Nevertheless, we expect continuing volatility in the market following global recession fears and geopolitical situation. Meanwhile, from the domestic side, risks from soft domestic demand and upcoming noises from politics are among the ones we need to pay attention to.

The Rupiah has been among the best performing EM currencies YTD, hence, we saw foreign investors taking profit from Indonesian equities and bonds in 3Q23. As a result, the Rupiah depreciated during the quarter. Additionally, Indonesia returned to current account deficit in 2Q23 while easing commodity prices and higher oil price is putting pressure to the trade balance. The USD itself has been strong as US macro data remained solid prompting the Fed to stay hawkish. The equity market’s performance has positive correlation with the currency. Hence, weak Rupiah may pose as risk to JCI in the coming months. Hence, we need to pay attention on the Rupiah’s movement as well as Bank Indonesia’s response to it. The launch of SRBI instrument is hoped to attract portfolio flow from foreign into Indonesia. However, we still need to monitor closely the demand and impact in the coming months.

As Indonesia is entering into political period, investors are hoping election money to start being distributed in 4Q23 to support private consumption. Additionally, the government is sitting on ample of cash and is hoped to spend more on social safety net to support domestic demand. As the year end is also a festive period, we believe that it would offer good momentum for domestic demand to rebound. At the moment, foreign investors are closely monitoring the political condition in Indonesia. As other countries are lacking catalysts at the moment, we think that foreign would still have Indonesia in its radar and waiting for the strong push that may be triggered by consumption recovery in the country.

Fixed Income

Indonesian bonds recorded a notable foreign outflow of US$857m in 3Q23, the first net outflow in the past three quarters. However, in year to date basis, Indonesian bonds still recorded a sizeable total inflow of US$4.8bn. Indonesia 10 years government bond yield increased by 67bps QoQ to 6.91% and The US 10-year treasury note moved up by 73bps to 4.57%. The sell-off trend happened as investors digested The Fed’s hawkish tone in September meeting where it maintained federal funds rate at 5.25%-5.5% while considered one more hike in 2023, according to the dot plot. The median dot plot for 2024 and 2025 rose by 50bps suggested that Fed will cut less than initially expected. Fed also pointed out resilience in US economy and upgraded their economic projection. Back in August, BI introduced Sekuritas Rupiah Bank Indonesia (SRBI) as a pro-market monetary operation (contraction) instrument that will use rupiah-denominated government bonds as underlying assets that can be traded in the secondary market by banks and can be owned by non-bank participants. The short tenor yields adjusted close to the levels of SRBI that was first issued on 15th of September. Yields awarded for the 12-months SRBI was at 6.4% on average. Based on DMO bond flow data as of 29 September, foreign ownership in government bonds fell significantly to Rp823tn or 14.95% of the outstanding (Rp842.62tn or 15.4% in the end of June).

Fixed Income Strategy

We remain positive on Indonesia from the fundamental standpoint. Fiscal balance management remains prudent despite the country is going into election in 2024. Indonesia is also on track to achieve lower debt-to-GDP in the medium term. Inflation continued moving lower to 2.28%yoy in September 2023 at the lower end of Bank Indonesia (“BI”) target. Risk from El Nino and higher fuel price likely to be manageable. However, weaker global growth and a potential recession still presents risk to Indonesia economy.

On the valuation side, the ten-year IndoGB at 6.89% starts to look interesting on outright basis. While on relative basis, 232bps of additional yield to the US ten-year yield still seems to be expensive as the five-year average of the two yields is at a much wider range at 480bps. Share of foreign ownership declined slightly to 15.1%, from 15.4% at the end of August. According to Debt Management Office (“DMO”), total incoming bid size for September month auctions wasat  Rp 107.9 trillion and awarded bid was Rp 46 trillion, about 2.3x covered. This suggest an adequate demand remains despite the coverage declined from last month at 3.4x.



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