Monthly Market Commentary
Monthly Market Commentary - December 2019
December 2019 monthly inflation was 0.34% or 2.72% year-on-year (YoY), below market’s expectations of 0.49% MoM or 2.90% YoY. Core inflation was 3.02% compared to market’s expectation of 3.14%. The slower inflation was mainly due to mild housing inflation and deflation in transportation price, resulted from the fall of air transport price. On the consumption side, indicative 4W sales showed continuing weak wholesales growth of -5% MoM. However, retail sales seemed to improve at +5% MoM.
Indonesia’s November trade balance came out at a larger deficit than expected at USD 1.3bn vs. market’s expectations at USD 132mn. The large deficit came as a surprise after the country booked USD 173mn of surplus in October. Weak commodity prices dragged exports down at 5.67% YoY in November despite stronger volume. Meanwhile, import fell by 9.2% YoY, an improvement from October due to stronger volume growth.
Looking at the fiscal space, budget deficit widened from 1.8% of GDP in October to 2.3% of GDP in November. Weak tax growth of 0.84% YoY was the main culprit as oil & gas income tax declined and VAT collection remain slow. Expenditure on the other hand grew by 5.2% YoY vs. 4.5% in the previous month. Social assistance disbursement managed to reach IDR 106tn and beat its IDR 97tn target.
On the monetary side, Bank Indonesia decided to keep the 7 days reverse repo rate at 5.0%. Overall, BI has cut the benchmark rate by 100bps in 2019. BI’s move to maintain rate this month is in-line with market’s expectations. Stable currency and inflation have allowed BI to go with loosening monetary policy this year.
Indonesian stocks regained strength in December 2019, up by 4.8% month-on-month. Foreign investors booked an inflow of USD 7.9tn (USD 571.09mn) in December up from IDR 6.9tn (USD 477mn) in November, led by inflows into big cap names. In December, the equity market was supported by bottom fishing move by investors after the market, especially, blue chip names were hit in November. Investors were also expecting window dressing move towards the end of the month. The phase one trade deal between the US and China gave positive sentiments to the market as the US not only cancelled its planned tariff hike on Chinese goods planned for the month, but it also slashed the tariff of USD 120bn Chinese imports it imposed last September from 15% to 7.5%. China also agreed to boost up imports of US agriculture goods to USD 40-50bn in two years. Though market has expected the phase one deal outcome, it is still cautious of the phase two deal to come in 2020. News on President Trump’s impeachment by the House of Representative came out which would bring the president to a trial hold by the Senate in January. However, market views President Trump’s impeachment to be unlikely as the Republicans made up the majority of Senate. Meanwhile, Bank Indonesia maintained its policy rate at 5.0% in December while November budget deficit was noted to be widened from 1.8% to 2.3% of GDP. The deficit should narrow, in our view, as December government revenue is usually stronger.
Agricultural stocks were the clear winner during the month, up by 11.7% as crude pam oil (CPO) price rallied by 16.1% to MYR 3,041/mt, the highest in almost 2 years. The rally was mainly driven by the B30 mandate in Indonesia, rise in soybean oil price, and the slower supply growth. Top 5 drivers were: AALI (+15.7%), BWPT (+65.2%), SMAR (+13.4%), SIMP (+19.3%), LSIP (+8.4%).
The US market continued its rally as investors shrug off the noises from President Trump’s impeachment while the US economic and job data also showed improvements. DJIA 28,538.4 (+1.7%); S&P 500 3,230.8 (+2.9%); NASDAQ 8,972.6 (+3.5%). Despite the president being impeached by the House of Representative, in order for the process to go through, the Senate would also need to agree on the impeachment. However, as majority of Senate is made up of Republicans, investors are more sceptical that the impeachment will proceed. Moreover, following the phase one trade deal between US and China, investors have started to take on riskier asset with a more positive view.
Asian market also closed in positive territory following the US-China phase one trade agreement. NIKKEI 23,656.6 (+1.5%); Hang Seng 28,189.8 (+7.0%); Shanghai Comp 3,050.1 (+6.2%); Straits Times 3,222.8 (+0.9%); FTSE Malay KLCI 1,588.8 (+1.7%); KOSPI 2,197.7 (+5.3%). Chinese industrial companies also showed stronger profit in November due to recovering factory production. China’s industrial profit grew at 5.4% YoY in November compared to -9.9% YoY in October. On the geopolitical side, North Korea has set and end-of-year deadline for the US to salvage nuclear diplomacy that hit setback during the meeting in Hanoi earlier in the year. North Korean leader, Kim Jong Un, asked his diplomats to prepare unspecified “offensive measures” to protect the country.
The European market continued its positive tone towards the end of the year on the back of the phase on US-China trade deal. FTSE 100 7,542.4 (+2.7%); CAC 40 5,978.1 (+1.2%); DAX 13,249.0 (+0.1%). Many top companies listed in the FTSE 100 generated most of their revenues from outside the UK and were benefitted by the fall of the Sterling. GBP exchange rate fell by 2.6% MTD to USD1.33/GBP at the end of December. Recently, concerns started to arise due to PM Boris Johnson’s plan to not extending any transition period for Brexit. Investors are worried that hard Brexit might still happen in 2020.
Outlook and Strategy
After the positive news from the phase one trade deal between US and China, market is now anticipating the next step, which is the phase two deal which remain to be seen. The phase two deal discussion should start after phase one is signed sometime mid-January 2020. We are cautious on the so-called phase two deal as we do not have any clarity yet on what it will pertain.
Meanwhile, market is anticipating more news regarding the upcoming Omnibus Law, which is hoped to be the driver of foreign direct investment (FDI) coming into Indonesia. The proposed corporate tax rate cut and other stimulus within the law, we believe, would be key drivers for the equity market in 2020. The government is said to submit the draft of the law to Parliament in January 2020. The law is hoped to be officiated sometimes in 2H20.
Looking at Indonesia’s GDP growth, market is estimating growth of 5.1-5.2% for 2020. We believe that domestic demand needs support from the government. Given the fiscal deficit of 2.3% of GDP as of November, we believe the government has limited room for spending to support growth.
The Fed’s move is the key for BI’s monetary policy next year as the stability of the Rupiah is BI’s main priority. Should the Fed continue with its dovish stance going into 2020, then it would give BI more room to cut policy rate. However, the Fed stated that it is aiming for 25bps rate cut in 2020 following the strong US job market data. Hence, room for BI to cut rate may be limited. At the moment, the Fed is expanding its balance sheet and pumping money into the banking system which weakens the USD. Thus, may support the IDR and give room for BI in the time being.
The upcoming FY19 corporate earnings coming out in 1Q-20 and the US election progress will be moving factors affecting the equity market in near future.
December 2019 saw the bond market turning sideways as the market’s performance was under pressure at the start of the month before recovering halfway through December. The 10-year government bond (FR78) yield fell from 7.110% to 7.063% at the end of the month. The yield peaked at 7.350% in the middle of the month before trending back down after. The main reason for the weak bond market at the start of the month was profit taking move from investors as the market has given strong return this year. The US Treasury yield has moved up from 1.777% to 1.921% due to strong US job market and favorable phase one deal outcome, while the USD denominated Indonesian 10-year yield (INDON29) closed at 2.86% at the end of the month.
The first half of the month saw pressure on fixed income mainly due to profit taking moves. We believe that investors also switched from fixed income to equity as they see equity valuation was already hit from November and anticipate market window dressing move towards the end of the year. The bond market also saw weak volume as there are no more auctions in December. There were also noises on the Ministry of Finance planning to increase fiscal deficit ceiling to 3% of GDP though the minister, Sri Mulyani, denied the news afterwards.
The bond market then recovered on the back of favorable outcome from the US-China phase one trade deal. The US did not go on with its plan to increase import tariff in December while it also slashed existing tariff it implemented to USD 120bn Chinese imports from last September from 15% to 7.5%. Moreover, the Fed has been expanding its balance sheet and injecting money into the banking system. The Fed’s move weakened the USD and gave support the Indonesia bond market. Bank Indonesia maintained its policy rate at 5.0% in December, in-line with market’s expectations.
As the government has achieved its bond issuance target in November, all December auctions were cancelled and there was no bond issuance for the month. YTD government bond issuance has reached IDR 902tn or 102% of target assuming year end budget deficit of 2.2% of GDP. As of the end of the year, foreign ownership of IDR government bond has reached IDR1,065tn, or equivalent to 39% of total outstanding amount.
Outlook and Strategy
On the supply side, the government normally front-load bond issuance towards the start of the year. As the Fed is still expanding its balance sheet, we believe that the weaker USD will continue to support the bond market for the time being. Risks in January may come from the next phase of the US-China trade deal progress. The Fed’s policy on its benchmark rate will also impact global central bank move for 2020. Hence, we will continue to monitor the USD trend during the month.
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