Monthly Market Commentary

Monthly Market Commentary - February 2020


The government announced 4Q19 GDP growth of 4.97% YoY, below street’s estimate of 5.00% YoY. The growth implies FY2019 GDP growth of 5.02% YoY, which is a slowdown from 5.17% YoY in FY2018. Overall domestic demand was sluggish during the year and investment particularly declined from 4.21% in 3Q19 to 4.06% in 4Q19.

January inflation was booked at 0.39% MoM or 2.68% YoY, below consensus’ estimates of 2.85% YoY. Core inflation was recorded at 2.88% YoY as the national statistics agency (BPS) has adjusted the inflation basket with lower weighting in food which should result to lower inflation volatility on top of the ever-stronger Rupiah. The main driver for January inflation came from raw food, beverage, and tobacco of about 0.41ppt out of 0.39% MoM inflation which is suspected to be due to the Jakarta flooding earlier in the month.

4Q19 Balance of Payment recorded a surplus of USD4.3bn, an improvement from USD46mn deficit in 3Q19. Overall, implying FY2019 Balance of Payment surplus of USD4.7bn vs. USD7.1bn deficit in FY2018. The surplus was driven by strong financial account surplus of USD12.4bn as a result of strong inflow into bonds and withdrawals from overseas banks into the onshore banking system in 4Q19.

On the other hand, CAD widened to USD8.1bn or 2.84% of GDP in 4Q19 from USD7.5bn or 2.60% of GDP in 3Q19 as exports did not manage to cover imports. Thus, FY2019 CAD narrowed to 2.72% of GDP from 2.94% in FY2018. The narrowing CAD was also driven by slower import growth resulted from weak domestic demand and lower oil and gas imports. January trade balance meanwhile was at  USD870mn deficit, wider than market’s expectations of USD375mn. Though imports was in-line growing at 4.78% YoY, exports declined by 3.71% YoY in contrast with market’s expectations of 1.19% YoY growth. The decline in exports were driven by lower volume of oil and gas exports. The government recorded January budget deficit of 0.21% of GDP as revenue fell 4.1% YoY while expenditure also declined by 9.1% YoY. Tax revenue contracted by 5.7% YoY in January due to weak corporate income tax growth of -29.3%. On the expenditure side, delayed regional fund transfer and high base effect on social spending caused expenditure to slow down.

In terms of monetary policy, Bank Indonesia cut the 7DRRR by 25bps to 4.75% during the month, in-line with market’s expectations.



Local Market

Indonesia’s equity market remained under pressure in February 2020 with the JCI index  dropped 8.2% due to global concerns surrounding the COVID-19 outbreak. Month-to-date, the equity market recorded net foreign outflow of USD339.7mn (IDR4.6tn). Investors were left alarmed with the recent corona virus outbreak as the number of cases has grown fast and breached 75,000 cases globally. As the virus spread beyond China and Asia Pacific, market has been trying to access the outbreak’s impact to economy and businesses. Amidst global uncertainty, gold price has rallied by 4.5% YTD and the US treasury rate has fallen from 1.92% to 1.15% as investors move their money to safe haven assets. A number of countries have passed on stimulus to support liquidity in the market. Central banks in China, Brazil, Thailand, and Indonesia among others have cut their policy rate this year. Bank Indonesia has cut the 7DRRR by 25bps this year following resilient Rupiah and low inflation. 4Q19 GDP growth was recorded at 4.97%, which implies FY2019 GDP growth of 5.02%. Weak domestic demand and investment remained the culprit for the sluggish growth. Meanwhile, FY2019 currend account (CAD) narrowed from 2.94% in FY2018 to 2.72% as import slowed down due to weak domestic demand and slower oil & gas imports. Towards the end of the month, the equity market was hit by noises on sugar and carbonated drinks excise tax, which was considered by the Ministry of Finance. However, this wais still being reviewed by the parliament and will take time to implement. Steep market sell-off also occurred as COVID-19 outbreak outside of China and Asia grew fast which, caused the US and Europe market to take a dive. In the meantime, the Omnibus Law is said to have been passed to the parliament for review and is hoped to be passed within 2-3 months period.

The Basic Industry & Chemical sector was the loser of the month, dropping 14.5% during February. Moreover, cement sales was also under pressure due to series of flooding in the country at the start of the year. The top 5 index drivers were: BRPT (-20.6%), TPIA (-10.4%), CPIN (-14.9%), TKIM (-37.1%), and SMGR (-14.8%).

Global Market

The COVID-19 outbreak has hit its toll on the US market as stocks plunged due to fear of the growing number of cases around the world. DJIA 25,409.36 (-10.1%); S&P 500 2,954.2 (-8.4%); NASDAQ 8,567.37 (-6.4%). The growing number of cases outside China and Asia has caused concerns on impact to US and global economy. Market is now expecting rate cut to come in the near term, as soon as April. By year end 2020, market now expects about three rate cuts compared to one cut assumption back in January. Meanwhile, oil price also fell following the virus outbreak with the WTI closed -16% WoW to USD44.76/Bbl in the last week of February, the worst weekly performance since December 2008 and lowest level since mid-2017. The US natural gas benchmark also dropped 12% WoW to USD1.68/MMBtu.

Asian market continued to fall MoM as the COVID-19 virus outbreak continue to grow within and beyond Asia. NIKKEI 21,142.96 (-8.9%); Hang Seng 26,129.93 (-0.7%); Shanghai Comp 2,880.30 (-3.2%); Straits Times 3,011.08 (-4.5%); FTSE Malay KLCI 1,482.64 (-3.2%); KOSPI 2,119.01 (-3.6%). China’s February NBS manufacturing PMI plummeted from 50 to 35.7 MoM as businesses shut down and caused shortage in labor and disruption in supply chain. Small enterprises also continued to be pressured with PMI falling from 48.6 to 34.1 while large and medium enterprises also saw a decline from 50.4 and 50.1 to 36.3 and 35.5 respectively.

The European market followed suit with market correction due to looming COVID-19 outbreak as the number of cases in Europe spiked led by Italy. FTSE 100 6,580.61 (-9.7%); CAC 40 5,309.9 (-8.6%); DAX 11,890.35 (-8.4%). Market is now expecting slight fall in Euro area GDP in 1H20 while global strategists have cut 2020 annual average growth to around 0.5%. Meanwhile, post Brexit, not much changes happened in the UK as the nation has entered into a stand still transition until the end of the year which would allow it to be in the EU single market and customs union and trade with the union without tariffs or non-tariff barriers. The UK is planning to negotiate future trading relationship with the EU by 31 December 2020.

Outlook and Strategy 

Year-to-date, the JCI index has corrected by 13.4% and now implies valuation of 12.8x PER, an attractive level at this juncture. However, as market still trying to assess the full impact of the corona virus outbreak to the economy and businesses.

Looking at the SARS pandemic in the early 2000s, we can split the outbreak into three phases including rising uncertainty, stabilization, and declining uncertainty where market corrected up to stabilization period before making a V-shape return. Thus, we believe that market needs to see the outbreak peaks first before we can see more stable recovery. Moreover, investors would first need to see 1Q20 macro data and corporate earnings to better quantify the impact of the virus outbreak. We are expecting consensus to downgrade their earnings forecast after 1Q20 corporate earnings come out at the end of April. We think the retail and tourism sector would be the ones hit most due to supply chain disruptions and travel warnings. Meanwhile, for every 1% decline in China’s GDP, we estimate Indonesia GDP would fall by about 0.3 ppt. Thus, we are expecting market volatility will continue between now and then.

At this juncture, the containment and stabilization of the COVID-19 outbreak would be the biggest positive catalyst for the market. Global governments have been introducing a number of stimulus to support the economy. Indonesia have introduced IDR10tn worth of fiscal stimulus to support the impacted sectors such as tourism and consumer. Bank Indonesia has already cut benchmark rate by 25bps in February as well. Further stimulus and the passing of the Omnibus Law would be other catalysts that could help the market.


Fixed Income

The bond market hit its brake in February as the 10-year government bond (FR78) yield climbed back up from 6.680% to 6.95% by the end of the month. The yield fell to its bottom at around 6.51% supported by series of successful bond auctions. However, investors’ concern on the recent COVID-19 outbreak reversed the downward trend. MTD, foreign investors recorded net outflow of USD1.9bn from the Indonesia bond market. Bank Indonesia has been the one supporting the bond market with its open market purchase of government bonds in February. The US Treasury yield fell from 1.5068% to 1.1486% while the USD denominated Indonesian 10-year yield (INDON29) closed at 2.734% at the end of February.

In the first half of the month, the bond market faced headwinds from the rising case of the COVID-19 outbreak. Foreign investors turned around with funds flowing out of the Indonesia bond market. However, the bond market remained resilient and yield fell down all the way to 6.515% as a result of strong bond auction demand. Bids continued to book record high and reached IDR127tn despite the foreign fund outflow. Bank Indonesia was the one who supported the bond market as they kept on buying government bonds to support liquidity. News of recent credit rating upgrade by the Japanese credit rating agency also gave slight positive sentiment to fixed income briefly.

However, as the virus outbreak continued to grow beyond China, global investors turned risk off as sell off occurred towards the last week of February. Thus, foreign fund outflow continued. Both the stock and bond markets faced correction with yield climbed up to 6.951% by the end of the month. Bank Indonesia cut the 7DRRR to 4.75% from 5.00% while the Rupiah weakened by 4.9% MTD to IDR14,318/USD.

In terms of issuance, February was another strong month as the government managed to issue about IDR154.3tn of bonds YTD. Demand continued to be record breaking as auctions for conventional government bonds recorded higher number of bids than last month. All-in-all, YTD bond issuance has reached 21% of the government’s FY2020 issuance target. As of end of February, foreign ownership of IDR government bond has reached IDR1,053.8tn, or 37.4% of total outstanding amount.

Outlook and Strategy 

Similar to equity, we believe that until the virus outbreak stabilize, bond investors will continue to be risk off and cause pressure to the bond market. Thus, we expect the bond market to be sideways until the end of 1Q-20 when we get more clarity on impact of the outbreak to the economy. In order to be positive again, we would need to see the COVID-19 outbreak to stabilize and decline. Further stimulus from the government and central banks as well as passing of the Omnibus Law would be other positive catalysts.

Bank Indonesia will remain supportive of the bond market and supply liquidity to ease the distressed market. BI also announced that it will reduce FX reserve requirement from 8% to 4% to create additional liquidity. Rupiah reserve requirement rate will also be cut by 50bps for banks that conduct export-import activities. Following recent market sell off, we believe that global central banks will be more accommodative in terms of policy.


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