Monthly Market Commentary
Monthly Market Commentary - April 2020
The national statistics bureau (BPS) announced April inflation of 0.08% MoM or 2.67% YoY, lower than March’s inflation of 2.96% YoY as the Greater Jakarta area entered PSBB. Though food inflation is relatively stable, transportation and communication related inflation both fell signifying deflationary trend. While PSBB has limit movement of people resulting to fall in transportation prices, weaker purchasing power has led telco providers offering cheaper and more affordable packages. Core inflation slipped from 2.88% in March to 2.85% in April.
March 2020 trade balance recorded a surplus of USD743mn, down from USD2.5bn in February, which brings 1Q20 trade balance to surplus of USD2.6bn. March exports fell by 0.2% YoY driven by electrical machines as well as iron and steel exports due to downstream programs in Morowali and Weda Bay. Imports fell by 0.8% yoy. Consumer goods imports supported overall imports while investment related imports contracted.
As of March 2020, budget deficit has reached 0.45% of GDP. Revenue grew strong at 7.4% YoY due to early SOE dividend payments, which reached IDR24tn, and public service revenue from the CPO fund. Meanwhile, tax revenue avoided negative growth and recorded 0% growth YoY supported by the significant excise increase. Income tax fell 6.0% YoY while VAT grew by 2.3% YoY. Expenditure grew by 0.1% YoY, soft growth due to weak material expenditure and transfer to region. On the other hand, social spending increased by 27.7% YoY on the back of the government’s front-loading strategy to support the mid-to-low income segment. Capital expenditure grew by 32.6% YoY due to better tender process on infrastructure projects.
Meanwhile, March forex reserve was recorded at USD121bn down from USD130bn in February due to Bank Indonesia’s currency stabilization efforts and government debt repayment. The central bank also maintained its policy rate at 4.50% while cutting the primary reserve requirement by 200bps implying IDR100tn additional liquidity in the banking system. In return, Bank Indonesia increased its secondary reserve requirement by 200bps which would require banks to hold more government bonds to support the fiscal deficit financing. The Rupiah has also strengthened during the month and closed at IDR14,882/USD due to the weaker USD amidst the Fed’s unlimited QE, weak imports, and the successful issuance of the USD4.3bn global bonds.
April was a rather volatile month for the JCI following the ongoing newsflows on the COVID-19 development, but the index managed to close positive at 3.9% MoM supported by news on Gilead Inc. on the last trading day in which their drug showed to be able to help COVID-19 recovery. Foreign fund still recorded an outflow of USD559mn (IDR8.8tn) from the equity market, hence, domestic investors have been the supporter of the JCI in April. Overall, the market has passed its panic sell mode as seen by the normalizing VIX index which has now fell to 37 from its peak at 83 in the middle of March.
In April, market was trying to assess the real impact of COVID-19 to the economy and real sector while in the same time trying to figure out when the outbreak will start to peak and diminish. Hence, development news in regard to COVID-19 was the main mover of the equity market such as governments’ policies in response to COVID-19, development of number of cases and deaths due to COVID-19, as well as progress on an effective vaccine.
Globally, all eyes were on the US as the nation has now become the epicenter of the COVID-19 outbreak with a total number of cases of 1,095,304 or 33% of the total number of cases globally. The state of New York alone has over 30% of the US’ number of cases. As the number of cases rapidly growing in the US in early April and President Trump stated that it will be difficult weeks to come for the US, market started the month in negative territory. However, news flow turned positive as the month progress as we started to see slower outbreak in the US and Europe towards the end of the month. A number of countries are also planning to ease down lockdown measures as they see the COVID-19 situation has improved in their respective countries. Domestically, the number of COVID-19 cases continued to grow and has reached 10,118 with 7.8% mortality rate, improvement compared to the start of the month at 9%. The government has also increased its measures to contain the outbreak in Indonesia by imposing large scale social distancing (PSBB) in the Greater Jakarta area and is considering conducting the same measures in other epicenters in the nation. The annual migration back to hometown and village during Lebaran period, known as Mudik, has also been banned with the government also banning all domestic air, rail, and sea passenger transportation. We started to see slowdown in number of daily new cases in Indonesia towards the end of the month. The revised state budget has also been announced which reflects 5.07% fiscal deficit with lower revenue target and slightly higher spending with reallocated spending between ministries. The revised budget also revealed financing to come from a mix of IDR and global bonds, multilateral loans, as well as the IDR450tn pandemic bond, which is still being discussed. The government also stated that Indonesia has received external financing facilities such as USD7bn of multilateral loan and USD60bn repo facility from the Fed. Bank Indonesia maintained its policy rate but cut the primary reserve requirement by 200bps while increasing the secondary reserve requirement by the same level. This injects an additional IDR100tn of liquidity into the banking system and requires banks to increase their holdings of government bonds. Amidst the outbreak, the government also announced that they will postpone the discussion of the labor reform in the Omnibus Law. Meanwhile, oil price continued to be pressured as it reached USD26/bbl by the end of April due to weak demand and oversupply. OPEC+ finally agreed to cut oil production by 9.7mn barrel per day starting in May but the weak demand still outnumbered the cut in supply. Towards the end of the month, the WTI crude oil price hit rock bottom and reached its historic low at -USD37.6/bbl due to lack of storage, oversupply, and expiring futures contract. The WTI price gradually recovered and reached positive territory again but remained weak at USD19/bbl by the end of April. Saudi Arabia and Russia has stated that it is prepared to further cut production during the OPEC+ meeting in June if needed.
The Jakarta Basic Industry and Chemicals Index recorded the most gain of the month (+31.3% MoM) driven by petrochemical companies BRPT and TPIA which are also among large cap names in the JCI. Top 5 index drivers were: BRPT (+100.0%), SMCB (+72.7%), TPIA (+71.0%), INKP (+38.4%), and TKIM (+25.3%).
The US market made a comeback in April after Congress passed the massive USD2.2tn fiscal stimulus while the Fed is in support with its unlimited QE and accommodative monetary policy. DJIA 24,345.7 (+11.1%); S&P 500 2,912.4 (+12.7%); NASDAQ 8,889.6 (+15.5%). News on the development of Gilead Inc.’s Remdesivir drug which proven to help recovery of COVID-19 also helped the market towards the end of the month. As the Fed’s policy rate is already at 0.00-0.25%, the central bank maintained its policy rate intact for the month. Consumer spending growth fell to -7.5% from +0.2% in February due to weak economy amidst COVID-19 while employees’ payrolls were cut. Hence, the US’ 1Q20 GDP contracted by 4.8% QoQ. Oil price was also hit as the WTI price reached negative territory at one point in the month due to excess supply, limited storage, and weak demand.
The Asian market also ended the month strong following the US market as hopes are high on possible vaccine for the COVID-19 as well curbing down the outbreak. NIKKEI 20,193.7 (+6.8%); Hang Seng 24,643.6 (+4.4%); Shanghai Comp 2,860.1 (+4.0%); Straits Times 2,624.2 (+5.8%); FTSE Malay KLCI 1,407.8 (+4.2%); KOSPI 1,947.6 (+11.0%). Countries in Asia were racing in pushing for fiscal stimulus reaching about 10% of GDP for some countries such as Singapore and Malaysia. Japan introduced its mega stimulus of JPY117tn while the Bank of Japan remains accommodative in its policies and liquidity pumping. As China reported 1Q20 GDP growth of -6.8% YoY, market is now forward looking after the country eased down its lockdown while country continue to push for stimulus to support consumption.
The European market also reported positive return in April in hopes for treatment for the COVID-19 and re-opening of some of its major economies. FTSE 100 5,901.2 (+4.0%); CAC 40 4,572.2 (+4.0%); DAX 10,861.6 (+9.3%). Some of the European countries are considering easing on their lockdown measures as the number of new cases started to slow down. The Euro Zone GDP fell by 3.8% QoQ in 1Q20. The ECB maintained its policy rate in April and continue to inject liquidity into the economy. The ECB also announced new funding operations called PELTRO with maturities staggered between June and September 2021.
Outlook and Strategy
We continue with our defensive strategy on equities following the volatile market amidst COVID-19 outbreak. As market currently waiting for 1Q20 macro data and corporate earnings to come out, we think the equity market will remain volatile and investors are assessing the impact of the outbreak to the real sector. We are looking to reduce our cash level and collect names that have strong fundamentals, defensive earnings, ample liquidity, solid balance sheet, and attractive valuation given the right entry points. Sector wise, we are still focusing on defensive ones such as consumer staples, telecommunication, and healthcare. We will also still focus on blue chips though are more careful with banking names due to risk of rising number of loans affected by COVID-19. We also note that although we are looking to enter into equity, we will do so gradually and not aggressively as we see the market will likely remain volatile for a while. Key risks are sluggish economy, development of COVID-19 outbreak, oil price volatility, and geopolitical risk particularly from the US and China tension.
In order for market to recover, we would need to see the COVID-19 outbreak to peak and deteriorate and an effective vaccine to be found. Currently, we started to see a slowdown in the number of new cases globally on a weekly basis. Meanwhile, institutions around the world are racing to find an effective vaccine to cure COVID-19. Governments and central banks around the world also have been supportive in giving out both fiscal and monetary stimulus to support their country’s economy. Stricter measures on self-distancing are also imposed by the government to help curb the outbreak. Thus, we believe that the governments are already heading to the right direction. Key risks that we need to look into in regard to COVID-19 are risk of prolong outbreak and lockdown as well as risk of second wave of outbreaks. Prolong outbreak and lockdown, in our view, may lead to a U shape economy recovery and may require countries to come up with more stimulus to support the economy, hence risking their stability. Meanwhile, should second wave of COVID-19 outbreak occurs, we would expect economy recovery to be more like a W shape recovery.
Another factor that has been causing volatility is the volatile oil price. We have seen oil price swung as extreme as falling into negative price for the first time in history when the WTI hit -USD37.6/bbl. Occasionally, we do see oil price recovering on weakness but then followed with another correction as, fundamentally, we are seeing a case of oversupply and weak demand in the oil market at the moment. OPEC+ has been supportive by agreeing to cut supply and Saudi Arabia and Russia also agreed to continue support the oil price and cut production further if needed. However, as the fall in demand outweigh the supply cut, we think that demand recovery would be more vital for a stable recovery in oil price. Hence, we would also need to see improving situations in regard to COVID-19 to help support the oil price. Based on our estimates, for every USD10 decline in oil price, Indonesia’s fiscal deficit would increase by 0.1% of GDP
The bond market was roughly flattish in April with the 10-year government bond yield moved from 7.910% to 7.905% by the end of the month. Foreign investors recorded slight net outflow of USD2bn from the bond market in April. The market was rather volatile during the month with yield rising up at the start of the month and peaked at 8.177% before making decline in the second week of the month towards 7.777%. Towards the end of the month the yield went back up and closed at 7.905%. The US Treasury yield was flat from 0.67% to 0.61% while the USD denominated Indonesian 10-year yield (INDON30) closed at 3.606% at the end of April.
April started with rising bond yields due to concerns on fiscal headwinds after the government announced that it will remove the 3% fiscal deficit cap until 2022 to allow more stimulus to support the economy amidst the COVID-19 outbreak. Risk of higher incoming bond supply and higher bond yields sparked concerns among bond investors. Meanwhile, the Rupiah at the time was also weakening beyond IDR16,000/USD which also pressured the bond market along with continuing foreign fund outflow.
Things made a turn when stream of positive news came out. First of all, the revised state budget revealed that the fiscal deficit will be financed by a mix of IDR and global bonds, multilateral loans, and IDR450tn pandemic bond among others where Bank Indonesia will be a standby buyer in the primary market, allowed by the government in this current situation. Hence, bond’s supply risk due to fiscal headwinds may not be as bad as investors thought. Second, the Rupiah has recovered to about IDR14,882/USD as the DXY weakened due to further balance sheet expansion by the Fed. Third, the government successfully issued global bond of USD4.3bn and was well subscribed. Fourth, Bank Indonesia cut the primary reserve requirement by 200bps, which added IDR100tn worth of liquidity into the banking system, while increased the secondary reserve requirement by the same amount, which would require banks to increase their bond holdings. Lastly, improving outlook on COVID-19 with slowdown in outbreak also helped with the investment sentiments. Overall, the bond market made a recovery mid-month without intervention from Bank Indonesia. Towards the end of the month, the bond yield inched up due to news on S&P downgrading Indonesia outlook, albeit maintaining current sovereign rating, and weaker government bond auction result. However, yield fell back down due to news that Gilead Inc’s drug was proven to show positive effect in helping COVID-19 recovery.
In terms of issuance, the government still managed to rake in some demand although mostly came from domestic as foreign continued to record outflow during the month. As of April, the government managed to issue about IDR485.6tn of bonds YTD. All-in-all, YTD bond issuance has reached 36% of the government’s FY2020 issuance target. As of end of April, foreign ownership of IDR government bond has reached IDR922.3tn, or 32% of total outstanding amount.
Outlook and Strategy
We maintain our defensive strategy on fixed income with a slightly underweight duration compared to the benchmark as we see the market will remain volatile amidst COVID-19 outbreak development and government policies reaction. We expect the bond yield to hover around current level for now. However, we see situation has improved much compared to last month as global volatility seems to have subsided as seen with the normalizing VIX index. The Rupiah has also made a recovery back to around IDR14,882/USD. We see that the USD may remain under pressure as the Fed continue to expand its balance sheet. Hence, should be a positive catalyst for the Indonesia bond market. We also see the government has given clearer picture on the financing for the fiscal deficit which would require about IDR400tn more bond issuance for the rest of the year. Hence, limiting supply risk.
We think that risk of sovereign rating downgrade is limited as Indonesia is not the only country who is increasing its fiscal deficit. The latest stimulus package from the Indonesia government accounts only about 2.4% of GDP compared to Singapore or the US at around 10% of their respective GDPs. Moreover, Indonesia current debt to GDP level is still relatively low at around 30% of GDP compared to other countries. The USD also will remain under pressure as the Fed continue to print money which should keep the Rupiah in a more defensive side. Hence, we think that credit rating agency is unlikely to cut Indonesia’s credit rating as long as the government is prudent and get the fiscal deficit level back below 3% by 2022.
Risk is if a second wave or infection occurs which would put the market back into panic mode. Shortfall in tax revenue is also a risk as should the revenue shortfall is higher than expected, fiscal deficit may also be wider. Prolonged COVID-19 outbreak and lockdown along with lower government revenue may require the government to issue more bonds to extend its fiscal stimulus and finance the wider deficit.
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