Schroders Indonesia Monthly Market Recap & Commentary – January 2023

06/02/2023

Macroeconomics

The government enrolled 2nd covid booster shot. Indonesia preliminary 2022 budget showed a solid number with budget deficit of -2.38% vs -4.5% target. Indonesia December trade balance recorded a surplus of USD3.89bn. BI increased the 7DRRR by 25bps to 5.75%, inline with expectation. Indonesia January inflation increased 5.28%YoY/+0.34%MoM.

Equity

JCI declined by 0.2%MoM to 6,839 amid almost Rp3.2tn net foreign sell. The index reached its low around 6,550 level during the second week on mounting pressure from rotation trade to reopening China market. The index recovered as some of the local investors bottom fishing and foreign investors returned to JCI on the last week of the month as valuation was undemanding and earnings outlook was positive FY23. Some big banks have reported the FY22 results and it was above consensus expectation. IDXTech (+6.2%) was the best sector performance on sentiment that interest rate was peaking. IDXEnergy (-4.7%) was the worst sector performance as coal price declined and normalizing.

Majority of the global indices recorded a positive return. Investors in western market turned positive as inflation was softening while economy remained resilient amid high interest rate environment. China reopening gave a positive sentiment to the Asian market. China also relaxed its policy in technology and property sector

We remain cautiously positive on equities as Indonesia still offers solid fundamentals from both macro and corporate earnings sides. However, we expect continuing volatility in the market following global recession fears on the back of higher inflationary environment, hawkish central banks, and geopolitical situation. The Rupiah has rebounded thanks to recent export proceeds repatriation regulation issued by Bank Indonesia. Though we need to continue to monitor the currency’s fluctuation.

Fixed Income

Indonesia 10 years government bond yield declined by 23.3bps to 6.707% as compared to the previous month. In comparison, the US 10-year treasury note decreased by 37.4bps to 3.505%. Bond yield declined as data showed future inflation might come down, i.e. slower wage growth, December nonfarm payroll was the lowest in the past 12 months and contracting ISM service index. Additionally, the market expected the Fed to slow down the pace of FFR hike with just 25bps increase on the Feb 1st meeting.

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 in 2022. We think that low foreign ownership of government bonds at about 14% would limit downsides in the bond market. The bond market has seen some recovery driven by foreign investors towards the end of 2022. Thus, valuation is looking pricy at this juncture. We think there may be some volatility in the short term, however, outlook for the bond market should be better for the remaining of the year on the back of ending rate hike cycle.

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