Schroders Indonesia Monthly Market Recap & Commentary – January 2024

In January 2024, JCI posted a return of -0.89% MoM and the 10-year government bond yield rose from 6.5% to 6.6%. Foreign investors booked inflow into equity market amounting to IDR 8.3 trillion and outflow from bond market amounting to IDR 160 billion. We expect continuing volatility in the market following global economic slowdown concerns and political situation.

13/02/2024

Macroeconomics

Bank Indonesia (BI) maintained the interest rate at 6.00% for the third consecutive months, inline with consensus expectation, as BI considered the rate is sufficient to strengthen Rupiah stability and maintain inflation at the targeted level of 1.5-3.5% in 2024. Indonesia headline inflation eased to 2.60% YoY in January 2024 with core inflation at 1.70%, from 2.8% and 1.8% respectively in December. Bank Indonesia recorded loan growth grew to 10.38% YoY in Dec 2023 from 9.74% YoY in the previous month driven by the investment loan (+12.26% YoY) and working capital loan (+10.05% YoY).

The Ministry of Industry recorded that manufacturing exports in 2023 reached US$186.98bn or 72.24% of the total export value of US$258.82bn. This realization exceeded the target of US$186.4bn. The gov’t officially impose tax on e-cigarettes starting January 1 2024 at 10% of cigarette excise. The policy is stated in Minister of Finance Regulation (PMK) Number 143/2023.

Indo forex reserve rose by 6.00% MoM (US$8.3bn) to US$146bn in Dec 2023, reaching 27 month high. The increase was driven by tax revenues and the withdrawal of government foreign loans. This figure is equivalent to financing 6.7 months of imports or 6.5 months of imports and servicing the gov’t’s external debt.

Indonesia consumer confidence index slightly increased to 123.8 in Dec 2023, after a fall to 123.6 in Nov 2023, and was mainly driven by the increase in current economic condition index to 113.6 from 113.0 while consumer expectation index declined to 133.9 from 134.2. Indonesia’s exports contacted by 8.30% YoY and imports by 1.00% YoY in 4Q23 after 18.6% and 11.9% contractions, respectively, in 3Q23.

The gov't will provide direct cash assistance (BLT) for food risk mitigation amounting to Rp200k/month from January to March 2024 to 18.8mn beneficiary families (translates to Rp600k/beneficiary family in 1Q24) with budget allocated of Rp11.25tn. The third party fund grew 3.80% YoY in 2023. Indonesia Deposit Insurance Corporation (LPS) forecasted the number to grow 6-7% in 2024, with loosening monetary policy going forward.

Equity

Indonesia Market

In the month of January, JCI posted a return of -0.89% MoM with foreign inflow of Rp8.3tn. LQ45 index posted a MoM return of 0.35% while IDX80 at -0.41%. Despite the sizeable foreign inflow during the month, JCI index posted negative return due to the fall of some names that drove the rally few months before, that were corrected in January. We’ve seen foreign investors were collecting big bank names due to solid earnings results from the banks. The dovish interest rate trajectory from the Fed and hopes for China’s recovery are what investors expect would support the market in 2024. However, uncertainties revolving the upcoming presidential election as well as depreciating Rupiah YTD gave some headwinds to the equity market towards the second half of January.

Global Market

US indices booked positive in January 2024 as DJIA 38,150.30 (+1.22%) S&P 500 4,845.65 (+1.59%). During the month, all eyes were focused on the FOMC meeting where Fed Chair Jerome Powell maintained the interest rate and said the central bank would likely not be comfortable enough with the path of inflation by its next meeting in March to cut interest rates. One of the reason was the strong labor market. US added 216K jobs (NFP) in Dec 2023 (prev/cons: 173K/170K), well above consensus. The employment continued to trend up in government, leisure and hospitality, health care, social assistance, and construction. This made the unemployment rate stayed the same in Dec 2023 from the previous month at 3.7%, slightly lower than the forecast of 3.8%. US JOLTs job openings increased by 101K to 9.03mn in Dec 2023, higher than consensus of 8.75mn and previous month of 8.93mn/8.75mn). The US economy expanded by 3.30% in Q4 2023, much better than forecasts of a 2.00% rise, and following a 4.90% rate in Q3. This gave a positive sentiment to the market as the soft landing narrative may happen. US Personal Consumption Expenditure (PCE) in Dec 2023 grew 0.20% (vs -0.10% in Nov 2023 and forecast of 0.20%). PCE saw their first increase in three months, driven by a 0.3% rise in services, while goods decreased by 0.2%. The annual rate remained constant at 2.6%, aligning with February 2021 lows and consensus.

Asia market booked mixed MoM in January 2024 with NIKKEI 225 36,286.71 (+8.43%), Hang Seng 15,485.07 (-9.16%), Shanghai Comp 2,788.55 (-6.27%). We still see slowdown that still persists in China during the month. China Mfg. PMI contracted to 49 in Dec 2023 (prev/cons: 49.4/49.6), the steepest pace in 6 months due to continuity of property sector weakness and deflationary risks, as new orders and buying activity led to the drop. Additionally, China non-Mfg. PMI edged up to 50.4 in Dec 2023 (prev/cons:50.2/50.5), slightly below expectation with overseas orders led the expansion, with a slight recovery from new orders and employment. During the month, market digested the news of China Evergrande that received an order to initiate liquidation. China Evergrande, once valued at over USD300bn, has been ordered for liquidation by Hong Kong court amid the fallout from the China's property market crisis – and this still made foreign investors hesitant to re-enter China even given their cheap valuation. Over in Japan, The Bank of Japan maintained its ultra-easy monetary settings at -0.10% but signalled its growing conviction that conditions for phasing out its huge stimulus were falling into place, suggesting that an end to negative interest rates was nearing. South Korean exports rose 18% YoY in January 2024 to $54.69 billion last month, much higher than a 5% in December, market the highest increase since May 2022. Singapore’s unemployment rate came in at 2% in 4Q23, unchanged from the previous quarter and at the same level compared with the same period in 2022.

Euro market booked mixed with FTSE 100 7,630.57 (-1.33%) and Deutsche Boerse AG DAX 16,903.76 (+0.91%). Eurozone inflation was booked at 2.9% in December 2023, up from an over two-year low of 2.4% seen in the previous month. It also marked the first uptick in inflation since April, mainly driven by energy-related base effects. Energy prices dropped by 6.7% last month while services inflation remained steady at 4.0%. The core inflation cooled to 3.4%, marking its lowest point since March 2022. For the PMI rate, eurozone countries remain in contraction in Dec 2023, with slight improvement from Italy. Eurozone unemployment rate decrease to 6.4% in Nov 2023, lower than consensus (prev/cons: 6.5%/6.5%). Spain recorded the highest jobless rate, while Germany recorded the lowest. The euro zone’s seasonally adjusted GDP was flat compared with the previous quarter and expanded by 0.1% versus the previous year. In a preliminary estimate, the euro area was seen posting 0.5% growth over the whole of 2023.

Equity Strategy

We think that Indonesian equities is now trading at a decent valuation at 14x PE 2024 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 economic slowdown concerns and geopolitical situation. Meanwhile, from the domestic side, risks from soft domestic demand and noises from politics are among the ones we need to pay attention to.

All eyes are on the Indonesian election in February 2024 as the country will choose its next president and vice president. The key for equity markets is less uncertainties and more clarity on policies. Hence, there may be a surprise upside to the market if the election is done in one round instead of two. Policies communication from the candidates are also important as investors are hoping for policies continuity into the new administration. Foreign investors have posted net inflow YTD into the equity market signaling that they are still upbeat with the country’s developments. We think election results will give a shock factor to index movement either positive or negative depending on the outcome though the shock factor would only last for few days as market will try to digest the result of the election. The policies and cabinet that the new president will bring are the key for investors outlook into the Indonesia market. Hence, we are hoping that the equity market can perform better once the election uncertainties clarify.

Meanwhile, geopolitical tension in the Middle East has been raising concerns among global equity investors. As the Red Sea conflict disrupts global supply chain while tension in the region is pushing up oil price. The higher oil price may pose as risk to global inflation as well as Indonesia’s trade balance as Indonesia is a net importer of oil. Hence, having the conflict contained is critical for the global economy which is at risk of a slowdown in 2024. However, we think that it is at the best interest particularly for the US to keep the conflict contained and inflation at bay as rising inflation may derail the dovish Fed rate trajectory laid out at the end of 2023. Not to mention the US election is coming up later in 2024 and thus it is crucial for inflation to be controlled.

Fixed Income

Global fixed income yields reversed its rally in January as market pushed back its expectation of March cut as economic data suggests that US economy remains on strong footing. Federal Reserves (“Fed”) maintained its benchmark rate and gave clear signal that March cut is unlikely. US treasury sold-off as this aggressive expectation was not met, the 10-year yield moved by 8bps to 3.95% after hitting 4.2% level during the month. US core PCE shown consistent signs of declining to 2.9% in December, while job numbers still robust. Dollar rallied by 1.92% to 103.27 represented by the DXY Index, and EUR and Yen were hit back to 1.08 and 146.9 level, respectively.

Locally, Rupiah followed the weakness and it depreciated by -2.4% against the Dollar to Rp15,780. At the back of this, Government bond yield 10-year sold-off by 10bps to 6.59%. BI maintained its benchmark rates and Sekuritas Rupiah Bank Indonesia (“SRBI”) auctions were reduced to once a week. Foreign booked an insignificant outflow of -Rp 0.16Tn and its ownership percentage declined to 14.76% from 14.93%. In terms of Rupiah bond auction, government managed to award Rp 93.8TN, while also successfully issued global bonds with US$2.05BN size across two tranches. Incoming bids for auctions and books for the global bonds were strong and Ministry of Finance (“MoF”) is on track to achieve their issuance target.

Fixed Income Strategy

Fiscal deficit is maintained at conservative levels and cash balance is estimated to be at high levels. Despite increased net issuance target for 2024, however large cash balance can act as a buffer. In terms of inflation, we continue to see decline in year over year trend. We think that inflation will be manageable, and Bank Indonesia is confident that inflation range will move lower and target a lower range of 1.5-3.5% for 2024. Softening commodity prices and weaker outlook on external demand on the other hand, may narrow our trade balance and we have returned to CA deficit. However, we think that deficit will be a lot lower than -2.5-3% level that we saw in the past. Few key risks we are monitoring; 1.Fiscal direction of the new administrations 2. Red Sea and Suez disruption that if unresolved could cause elevated freight costs 3. Weakness in China economy 4. Politics: Local and US Election.

On the valuation side, the ten-year IndoGB at 6.59% had rallied from initial level that we thought most attractive at closer to 7.0%. On relative basis, 265bps of additional yield to the UST ten-year yield still seems to be expensive as the five-year average of is at a much wider range at 480bps though the rally in UST has helped widening the spreads. Share of foreign ownership declined at 14.76%. Looking ahead, With Fed likely to cut in 2024 that will clear path for BI to cut as well and in this environment, we believe we may see rally in rates market and foreign will start to tap in to IndoGB market more meaningfully.

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