Schroders Indonesia Monthly Market Recap & Commentary – October 2022

10/07/2022
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Macroeconomics

Indonesia October inflation eased to +5.71%YoY from +5.95%YoY in September. BI increased policy rate by 50bps to 4.75%. Indonesia September trade surplus recorded at USD4.99bn. Indonesia 9M22 budget surplus recorded at Rp60.9tn from Rp107.4tn in the previous month. September consumer confidence index declined to 117.2 from 124.7 in the previous month.

Equity

JCI increased by 0.8% in the past one month with around Rp 11.3tn net foreign buy. Rupiah weakness was a headwind and caused the index dropped to 6,800ish level in the middle of the month. The index reversed its course and rebounded as the 3Q earnings season kicked in and BI hiked policy rate to manage currency stability. The best sector performance was IDXEnergy (+7.8%) as energy price remained elevated. IDXNonCyclicalConsumer (+5.3%) posted a solid performance on volume recovery, declining soft commodity prices, and some benefitted from strong USD in export market. IDXTechnology (-7.3%) was the worst performer amid rising interest rate and its path to profitability remained challenging.

Majority of the global indices recorded a positive return supported by solid 3Q earnings result amid growth slow down and central bank tightening. China market underperformed its peers due to US chip export control bill and persistent zero covid policy implementation.

We remain cautiously 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. Recent fuel price hike will push up inflation and we have seen Bank Indonesia becoming more hawkish in adjusting its policy rate. Though cash handouts from the government is expected to support consumption, we would need to monitor purchasing power especially among the mid-to-low end segment. Additionally, pressure on the IDR may also blow headwinds to the equity market though we think that Bank Indonesia may come in and give support when necessary.

Fixed Income

Indonesia 10 years government bond yield increased by 16.4bps to 7.537% as compared to the previous month. In comparison, the US 10-year treasury note increased by 17.5bps to 4.010%. 10yrs UST reached 4.2% level after the release of NFP data and expectation of 75bps FFR hike on the upcoming FOMC November meeting. The yield declined on the last week as data showed that inflation was moderating.

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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