Market Commentary - 2Q 2022


The government allowed homecoming as Indonesia new covid cases had been at low level. A week before the long holiday, 7DMA daily new cases was at around 650 level. Domestic travellers that have received booster shots were not required to show their negative PCR or antigen test. Fully vaccinated travellers were still asked for 1x24 hours negative antigen test or 3x24 hours negative PCR test. Ports, roads, and recreational area were congested as this was the first allowed homecoming after 2 years. Indonesia did not see the daily new covid case rose exponentially after the Hari Raya holiday. High vaccination rate and herd immunity has taken an active role in combating the community spread. The government increased the PPKM status in Jabodetabek to level 1. Restaurant, movies, mall, and wedding reception capacity can be at 100%.

1Q22 state budget recorded a surplus of Rp10.3tn (vs surplus of Rp19.7tn in 2M22) equivalent to a surplus 0.06% of GDP. Total revenue grew 32.1%YoY to Rp 501tn with Tax revenue increased 41.4%YoY to Rp322.46tn. Tax revenue achievement accounted for 25.49% of FY22 target. Strong revenue growth was driven by higher commodity price, voluntarily disclosure program, and economic recovery. Government spending contracted by 6.2%YoY to Rp490.6tn or reaching 18.1% of FY22 target. The surplus expanded with 5M22 budget surplus widened to Rp132.3tn (+0.74% of GDP) vs Rp 103.1tn in the 4M22. State revenues grew 47.4% YoY to Rp 1,070.4tn reaching 58% of FY22 target. Strong revenue collection was contributed by higher commodity prices and recovering economic activities. Government spending contracted by 0.8%YoY to Rp 938.2tn and accounted for 34.6% of FY22 target.

Indonesia 1Q22 total investment increased 28.5% YoY. FDI increased 32%YoY to a new record high of Rp147.2tn. The biggest source of investment came from Singapore with USD 3.6bn followed by Hong Kong of USD 1.5bn, China USD 1.4bn, Japan USD 0.8bn and US of USD 0.6bn. Sector wise, the inflow went to base metals, transportation, warehousing, telecommunications and utilities.

Indonesia 1Q22 GDP booked at 5.01%YoY. Private consumption picked up by 4.3%YoY vs 3.6%YoY in 4Q21 despite omicron wave in 1Q22. Investment increased 4.1%YoY with machinery and equipment rose 19%YoY while building investment was still soft at 2.9%YoY.

Indonesia 1Q22 BoP recorded a deficit of USD 1.8bn vs 4Q21 deficit of USD 0.8bn. The financial account booked a deficit of USD 1.7bn due to larger overseas placement and net foreign outflow of Indonesia government bond of Rp USD 2.9bn. The current account recorded a surplus of 0.1% of GDP thanks to significant surplus in trade balance of USD 11.1bn. The government lifted CPO export ban as domestic cooking oil price has softened and to support local CPO farmers.

Indonesia April trade surplus recorded at all time high of USD7.56bn. Export jumped 47.7%YoY thanks to higher coal and CPO prices as well as solid iron & steel exports. Import growth softened to 21.9%YoY led by lower capital goods and consumer goods demand as a result of supply disruption in China and front-loaded import related to Hari Raya. May trade surplus recorded at USD 2.9bn which was lower than market expectation of USD 3.83bn. Export grew at 27%YoY which was the softest growth in the past few months due to less working days during the Hari Raya festivity and CPO export ban. Import rose 30.7% on stronger domestic demand.

BI kept the interest rate unchanged at 3.5%. BI expected the current account will record a surplus in 2Q22 and FY range target a deficit of 0.5-1.3%. Economic growth and inflation forecast were kept at 4.5-5.3% and 2-4% respectively.

The government increased electricity tariff for usage of >3,500 VA by 17.6% to Rp1,699.5/kwh. The tariff increase was targeting around 2.4mn customers or 3% of total electricity subscribers. Indonesia May consumer confidence index jumped to all times high at 128.9 as covid cases remained low and economic activities improved. The world bank cut FY22 global growth forecast to 2.9% from earlier estimate of 4.1%. The geopolitical tension in eastern Europe and high inflation were the culprit for the modest growth.


Local Market

JCI declined 2.26% QoQ to 6,912 despite hefty net foreign buy of Rp29tn in the second quarter of the year. The index reached its all times high at 7,355 on April. The market had plenty of positive sentiment: 1) Consumer recovery as homecoming was allowed by government, 2) Improving macro and trade balance from elevated commodity prices and 3) Stronger than expected 1Q corporate earnings. The index was deeply corrected after the Hari Raya holiday due to foreign pressure. The global concern on central bank tightening, persistently high inflation and higher global political tension triggered the investor to took profit in Indonesia market.

The index rebounded at the beginning of June, approaching to 7200 level, yet local investors took profit as the index was close to its all times high and preferred to wait on the sideline ahead of US inflation data. Foreign started to take profit once IDR was depreciating against USD ahead of BI policy meeting. The best quarterly performer was IDXEnergy (+10.6%) as some European countries, Japan and South Korea utilities companies halted their coal purchases from Russia. The worst performer was IDXFinancial (-11.5%) due to profit taking on the conventional banks and deep correction on the digital banks.

Global Market

For the 3 months period, the US equity market was corrected with DJIA/S&P500/Nasdaq booked -11.3%/-16.4%/-22.4% respectively. The market weakness was a combination of higher inflation, central bank tightening, rising rates and slower economic growth. US may inflation accelerated to 8.6%YoY from 8.3% reading in the previous month; the core CPI increased 6%YoY. On the last meeting, the Fed hiked rate by 75bps to combat inflation and investors were worried that the tightening might cause economy growth to slow down or driving the economy into recession. The Fed cut its FY22 GDP projection to 1.7% from 2.8% earlier. US 1Q22 GDP fell 1.4%; below consensus expectation of 1% growth. The street was still cautious as Fed Chairman Mr Powell mentioned that he could not guarantee soft landing for the economy. Nasdaq was hit the most as rising interest rate was a negative sentiment to technology stocks and some corporates indicated a slower growth in the coming quarters.

Asian market had a mixed performance with NIKKEI 26393.04 (-5.1%); Hang Seng 21,859.79 (-.6%); Shanghai Comp 3,398.62 (+4.4%); Straits Times 3,102.21 (-9.0%); FTSE Malay KLCI 1,444.22 (-9.0%); KOSPI 2,332.64 (-15.4%). The Chinese markets outperformed its peers as the cities gradually lifted mobility restriction as covid cases went lower. China June Manufacturing PMI improved to 50.2 (highest reading in the past 4 months) from 49.6 in May as mobility restriction eased. Consumer confidence in the region dropped with South Korea June consumer confidence index decline to 96.4 vs 102.6 in the previous reading. Japan June consumer confidence index fell to 32.1 vs 34.1 in May reading. Japan kept the rate unchanged, continued its loose monetary policy, and caused Yen to slide.

FTSE 100 7,169.28 (-4.6%); CAC 5,922.86 (-11.1%); DAX 12,783.77 (-11.3%). Eurozone May inflation recorded at 8.1% (a seventh consecutive record high) driven by energy and food prices. Eurozone May manufacturing PMI softened to 54.6 from 55.5 in the previous month. ECB to hike interest rate (first time since 2011) by 25bps on the next July meeting and might potentially increase again on the next September meeting depending on the trajectory of the inflation rate. The Bank of England hiked rate for the consecutive fifth time by 25bps to 1.25%. BoE expected the inflation to rise above 11% in October on higher food and energy cost. The Swiss National bank unexpectedly hiked 50bps, the first time since 2007, due to inflation risk. Investors were turning cautious on the possibility of recession in the region.

IMF cut global growth forecast due to Russia’s invasion. Russian economy was forecasted to decline by 8.5% from several sanctions emplaced while Ukraine's to decline by 35% on the war. EU growth was slashed at 1.1ppt to 2.8% due to its energy dependency to Russia. IMF estimated inflation to reach 5.3% in EU. EU proposed a gradual ban of Russian oil and removed Russia’s largest bank from the SWIFT system.

Equity Outlook and Strategy 

We remain 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. 

We started to see some foreign fund outflows in the previous month due to global macro shake ups after inflation continued to spike up in the US and, thus, prompting the Fed to be more aggressive in rate hikes. However, the foreign outflow has been light and got balanced out with some inflows now and then. Hence, YTD foreign fund flow is still a large inflow. Though some foreign investors have considered taking profits from Indonesia, they are still left with limited choices for markets they find attractive enough to reallocate their fund to. Elevated commodity prices and expectation of strong 2Q22 GDP should remain as catalysts for Indonesia equity. Thus, foreign investors are still holding on to Indonesia.

We think that risks in Indonesia may come from inflation which may start to increase in coming months. Overshooting inflation may cause disruptions to economic recovery and growth as well as causing panic just as it did in the US. Risk of recession in developed countries could also pose as risk to Indonesia equity. Should consumption get hit in developed countries, there may be pressure coming to commodity prices which would hurt the Rupiah and Indonesia’s macro stability if domestic demand does not pick up. As government is also actively pursuing growth in tax revenue, we think that growth may also be at risk if consumers are overly hit by taxes. Lastly, we have seen strong foreign inflow coming in from China since late 2021. As China start to show improving PMI and garners more interests from foreign investors, there may be risks of foreign fund flow reversal back to China should conditions continue to improve in China. Hence, we need to be vigilant and continue to monitor the market.

Fixed Income

Indonesia 10 years government bond yield jumped 48bps to 7.22% as it faced a pressure from the global situation whereby policy rate increased and yield was climbing. The US 10-year treasury note increased by 67.4bps to 3.013%. The Fed was committed to combat inflation using the policy rate. Additionally, The fed officials agreed to reduce its balance sheet by USD 95bn per month starting in May. On the last meeting, The Fed increased the rate by 75bps to a range between 1.5-1.75% (highest hike since 1994). The Fed highlighted that the central bank might increase the rate by a similar magnitude on the next meetings depending on the data and economic outlook. New dot plot projection showed federal fund target rising to 3.4% by year end vs earlier expectation of 1.9% in March. The Fed increased the inflation outlook to 5.2% from 4.3% earlier. Based on DMO bond flow data as of June 28, Foreign ownership recorded at 16.1% of the outstanding and outflow of Rp112.4tn YTD. Indonesia 10 years USD global bond yield at 4.48%. IDR depreciated by 3.87% to 14,898.

Fixed Income Outlook and Strategy 

Higher inflation and rising interest rates would pressure the bond market. In addition, the current tension in Ukraine may push up commodity price and inflation. We think local investors will be the main supporter of IndoGB in the near term while foreign investors would be in defensive mode as inflation risk remains. One risk is the fact that banks may start to grow their loan once again as the economy recovers, hence, reducing the needs for them to keep government bonds as reserve. We think that low foreign ownership of government bonds at about 16% would limit downsides in the bond market while high real yield and low inflation in Indonesia continues to attract foreign investors. Hence, should market get corrected, foreign investors may look to re-enter at attractive entry points.

In the past month, the bond yield has been volatile as many investors trade on momentum out of concerns on long term outlook on the bond market due to expectations of rising inflation and interest rate. Foreign investors are still risk-off due to concerns on understated inflation. However, we think that market’s concerns on inflation have already been reflected as shown by the uptrend in bond yield and massive foreign outflow YTD. Hence, we think that downside in the bond market should already be limited at this juncture. However, we are waiting for the best entry point into the market as the Fed continues to sound hawkish in its statements.




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