Monthly Market Commentary
Monthly Market Commentary - January 2020
Indonesia’s FY19 inflation was recorded at 2.72% YoY vs. 3.13% YoY in FY18 which is the lowest point since the 1997 Asian financial crisis. Core inflation was at 3.02% YoY. December 2019 inflation alone was at 0.34% MoM. The most notable factors to the low inflation level was due to the deceleration of transportation and housing inflations. Meanwhile, the government announced that it is cancelling the electricity tariff adjustment this year. State owned oil company, Pertamina, also announced that it is adjusting down non-subsidized fuel effective on 5 January 2020.
Meanwhile, tax revenue was recorded at IDR1,545tn or 87% to FY19 target as of end of December. Thus, budget deficit closed at 2.2% of GDP in 2019. December foreign reserves was recorded at USD129bn vs. USD127bn in November. Indonesia’s 2019 trade balance closed with a deficit of USD3.2bn, narrowed down from USD8.7bn, as imports fell deeper at -9.5% YoY than exports at -6.94% YoY as a result of weak domestic demand. December trade deficit also narrowed from USD430mn in November to USD28mn due to strong CPO and copper exports.
Meanwhile forex reserve rose from USD126.6bn in November to USD129.2bn in December. News broke out that the UAE is confirmed to invest USD23bn into Indonesia via the sovereign wealth fund. The Rupiah remained strong at IDR13,655/USD and has strengthened by 1.5% YTD as the Fed continues its balance sheet expansion. Bank Indonesia also announced that it is maintaining the 7 days reverse repo rate at 5.0%, in-line with market’s expectations.
The Indonesia equity market started the year on choppy water as the JCI dropped 5.7%. Excluding crossings, foreign recorded a net outflow of USD127mn (IDR1.7tn). As the valuation gap between bond and equity closed in at the start of the month, investors were more bullish in equity and chased blue chip names. The market’s positive start of the month was also sparked by investors’ hopes in the Omnibus Law, which is expected to be passed this year, as well as the better outlook on the US-China trade war after the signing of the phase one deal. The Rupiah remained strong and appreciated by 1.5% in January. Meanwhile, December 2019 inflation number came out at 2.72% YoY, lower than street’s expectations, while trade balance improved in December mainly due to strong CPO and copper exports resulting to a surplus of USD22bn, the first surplus in almost a year. Noises on the tension between US and Iran managed to spark volatility in the market and spiked up oil and gold prices, but the market normalized a week later after President Trump’s announcement that the US would like ease down the tension. The market’s correction started in the second half of the month sparked by profit taking moves, noises from the mutual fund scandal, and the recent outbreak of the corona virus. On top of that, market liquidity is rather dry. During the month, there were changes in the LQ45 index with the inclusions of TBIG, TOWR, and ACES as well as the deletion of INDY, TPIA, and MEDC. The removal of TPIA managed to drag down the market as TPIA’s weighting in the JCI index is quite significant. Bank Indonesia maintained its policy rate at 5.0% during last month’s meeting.
Agricultural stocks were the losers of the month after outperforming in December. The main reason was due to the corona virus outbreak and the CPO price correction of 13.2% MoM to MYR2,640/mt. The top 5 drivers within this sector were: AALI (-18.5%), LSIP (-20.9%), BWPT (-26.8%), SMAR (-9.7%), SIMP (-14.8%)
The US market recorded its first MoM drop in months as investors were left with uncertainties surrounding the recent corona virus outbreak as China accounts of 6% of all S&P500 companies revenue in the past year. DJIA 28,256.0 (-1.0%); S&P 500 3,225.5 (-0.2%); NASDAQ 9,150.9 (+2.0%). The NASDAQ index was the only outperformer due to Amazon’s strong earnings result. Consumer spending eased to 0.3% MoM in December from 0.4% in November as income growth slowed while inflation picked up.
Asian shares tumbled amidst the outbreak of the corona virus as investors questions on impact of the outbreak to the overall Chinese economy and businesses. NIKKEI 23,205.2 (-1.9%); Hang Seng 26,312.6 (-6.7%); Shanghai Comp 2,976.5 (-2.4%); Straits Times 3,153.7 (-2.1%); FTSE Malay KLCI 1,531.1 (-3.6%); KOSPI 2,119.0 (-3.6%). The outbreak caused China’s market to extend its holiday post lunar new year until 3 February where the market plunged around 8%. The PBOC announced that it will inject CNY1.2tn of liquidity into the market and cut reverse repo rate by 10bps in response to the recent corona virus spread.
Following the global market, the European market also fell as a result of the rising corona virus death toll and infection. FTSE 100 7,286.0 (-3.4%); CAC 40 5,806.3 (-2.9%); DAX 12,981.97 (-2.0%). Meanwhile, at the end of January, the UK officially left the European Union which should clear up the long going Brexit uncertainties.
Outlook and Strategy
We are constructively more bullish on equities this year. As the gap between equity and bond valuation narrowed, equity becomes more attractive to investors. This is supported by better US-China trade outlook post phase one signing. Blue chip names were chased by investors such as the banking sector. Current bond yield has reached about 6.6% while earnings yield is at 6%. Moreover, compared to developed market, emerging market currently offers more attractive valuation.
Additionally, we expect better corporate earnings growth of about 7% vs. 0-2% in 2019. More favorable macro conditions including the strong Rupiah, low inflation, stable oil price, as well as recovering CPO price all would help give better standing for corporates and improve purchasing power. Following December’s strong trade balance, we expect the trend to continue as export grow stronger while import savings increase. Thus, current account deficit should improve as well. Moreover, we expect Bank Indonesia to still have room to cut its policy rate by 25bps this year. Stimulus will more likely come from the monetary side rather than fiscal as the government currently has limited fiscal room for additional spending.
We do believe that we still need a stabilizer from fixed income to balance equity as there are still looming risks and uncertainties surrounding the equity market. Though the US-China trade war noises are muted at the moment, it remains a risk that could come up anytime. The US election also can bring in sentiments to the global market in 2020 as we are yet to hear who the candidate from the Democratic party will be. Recently, the outbreak of the corona virus also dragged the global market as investor fears the pandemic might be as damaging as the SARS outbreak in 2003.
The passing of the omnibus law would be the key catalyst for the equity market. The regulation, if passed, would help attract FDI and improve corporate earnings as the law would help cut down corporate tax, promote labor reform, and push for lower employee severance pay. We expect the law to be passed sometime in 2H-2020.
January overall continued to be a strong month for fixed income as the 10-year government bond (FR78) yield fell from 7.063% to 6.669% by the end of the month. The bond market was supported by the strong government bond auctions, foreign fund flow, and the strong Rupiah at the start of the year. Moreover, the signing of the phase one US-China trade deal also brought positive sentiments to the market. The yield then bottomed at 6.626% before inching back up to 6.669% due to the negative sentiments from the recent corona virus outbreak. The US Treasury yield fell from 1.921% to 1.560% while the USD denominated Indonesian 10-year yield (INDON29) closed at 2.77% at the end of January.
The bond market was off with a strong start in the beginning of January as the yield breached below 7%. The low 2019 inflation and strong Rupiah were the key drivers for the bond market. Moreover, the government’s first bond auction resulted in a bid of over IDR80tn, which was almost 10% of FY2019 total issuance. Following the issuance, foreign investors continued to chase the bond in the secondary market as only about 23% of total issuance of IDR20tn was awarded to them. There was volatility in yield at the start of the month due to noises from the US-Iran tension. However, the bond market remained strong and yield continued to decline to 6.626%.
Towards the end of the month, the yield started to inch back up due to the recent outbreak of the corona virus. The outbreak has caused global market to jitter as the virus has spread to multiple countries. Thus, the bond market has been volatile towards the end of January. Since the news broke out regarding the virus, the US Treasury yield has fallen from about 1.8% to 1.5%. Meanwhile, Bank Indonesia maintained its policy rate at 5.0% during its meeting in January, as expected by the market. The Fed also maintained its benchmark rate at 1.50%-1.75%.
It was a good month for bond issuance where the government managed to issue IDR95.4tn of bonds YTD. Demands were overwhelming as bids during the auctions have reached around 4x of target issuance. Thus, the government has reached 13% of its FY2020 issuance target. Meanwhile, the government has also issued global bonds equivalent of USD2bn and EUR1bn. As of the end of the month, foreign ownership of IDR government bond has reached IDR1,091.3tn, or 39.2% of total outstanding amount.
Outlook and Strategy
The government seems to take a different strategy in bond issuance and is going with a more spread out issuance instead of front loading. Thus, bond supply risk should be lower and give support to bond price. IDR bond market stands as on the best risk and return assets given an attractive real yield spreads and low inflation.
We believe that Bank Indonesia still has room to cut its policy rate by 25bps in 2020 due to the strong currency and low inflation. Moreover, the Fed has been signaling its dovish stance on its monetary policy. Although the US central bank claimed that it will maintain policy rate for the year at 1.50-1.75%, the Fed chairman, Jerome Powell, stated that the Fed will continue with its open market purchase and expand its balance which would weaken the USD and give upside to emerging market currencies, including the Rupiah.
The Omnibus Law would also be a positive catalyst as it may drive in FDI and limit bond supply risk further. The government’s stand to rely more on the private sector and foreign investors in its financing needs would imply a more limited government bond issuance.
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