Schroders Indonesia Monthly Market Recap & Commentary – August 2022

07/09/2022

Macroeconomics

Indonesia 2Q GDP surpassed expectation at +5.44%YoY vs 5.2% forecast. July trade balance recorded a surplus of USD 4.22bn vs expectation of USD3.95bn. Indonesia 2Q current account reported a surplus of USD3.85bn or equivalent to 1.1% of GDP. Bank Indonesia increased the policy rate by 25bps to 3.75%. August inflation recorded at 4.69%YoY / a deflation of 0.21%MoM.

Equity

JCI gained 3.3% in the past one month with around Rp 7.5tn net foreign buy. Better than expected earnings results coupled with series of solid macro data and stabilizing oil price has attracted foreigners to return to Indonesia market. Market reaction was muted on unexpected BI rate hike yet investors were cautious approaching the end of month as government was calculating and considering increasing the fuel price. The best index performer was IDXInfrastructure (+5.5%) lifted by telecommunication and tower companies as competition subdued and improving macro condition that benefit the sector. IDXEnergy (+2.2%) was positioned as second best performer thanks to elevated coal prices. IDXCyclical (-1.7%) was the worst performer dragged down by retailers and media companies.

The US and European indices declined of hawkish Fed statement while Asian indices mixed. The Fed acknowledged that tight policy would mean slower growth and softening labor market yet the impact of failure in restoring price stability would be worse than it. PBOC cut rate to spur growth. Inflation was still rising in many countries on higher food and energy prices.

We expect continuing volatility in the market following global recession fears on the back of higher inflationary environment and geopolitical situation. Upcoming fuel price hike also could result to knee jerk reaction to the equity market though we think impact should be healthy for the long term.

Fixed Income

Indonesia 10 years government bond yield was flat at 7.13% compared to the previous month. In comparison, the US 10-year treasury note increased by 54.7bps to 3.198%. They yield went up as the Fed to maintain its hawkish stance. The Fed Reserve Chairman reiterated the central bank's focus to bring down inflation to 2% target in the Jackson Hole meeting. He also argued that restoring price stability would require restrictive tight policy stance for some time and the Fed would avoid premature policy loosening. Indonesia 10 years USD global bond yield at 4.04%. IDR was flat at 14,843.

Higher inflation and rising interest rates remain as challenges to the bond market though we think that the negative sentiments have been mostly priced in reflected by the large foreign outflow YTD. We think that low foreign ownership of government bonds at about 15% would limit downsides in the bond market. Hence, should market get corrected and yield jump up, foreign investors may look to re-enter at attractive entry points. However, inflationary risks would also limit upside at this juncture, thus, we do not expect any major rally in the bond market in the short term.

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