Monthly Market Commentary
Monthly Market Commentary - December 2018
Year-to-November 2018, tax and non-tax revenue grew 15.6% and 28.6% yoy, respectively on the back of tax reform and higher commodity price with the latter also pushed up non-tax revenue. Total expenditure also saw a healthy 11.0% yoy growth with social assistance and subsidy continue to be main drivers as the government continued focus on supporting grassroots purchasing power. Market expects budget deficit to remain healthy at 1.94% of GDP compared to 2.63% in 11M-2017.
November 2018 trade data posted another negative surprise with deficit came in at USD 2.1bn versus market expectation of USD 735mn. This was Indonesia’s largest monthly deficit since July 2013. Disappointing exports figure which contracted by 3.2% yoy was the main culprit, driven by slowing volume and price of commodity prices, in particular coal on the back of China imports ban. This was despite of imports growth which had eased to 11.7% yoy (from 24.1% in October 2018).
Despite looming trade deficit, Bank Indonesia (BI) maintained the benchmark interest rate at 6.0%. The officials see capital inflow totalling USD 7.9bn in November 2018 was sufficient to offset trade deficit as evident by the stable Rupiah. The Fed dovish tone during last meeting with only hinted for 2 hikes in 2019 also put some comforts. BI is looking 2019 GDP growth at 5.0%-5.4% yoy. Nevertheless, market still expects BI to continue interest rate hike in 2019 as CAD risk continues and portfolio flow remains volatile.
Inflation remained under control with December 2018 consumer price index (CPI) came in at 0.62% mom, though slightly above expectation of 0.53% mom. This brought yearly CPI to 3.13% yoy, below the initial target of 3.5%. Accelerating chicken, meat and egg, as well as air transport prices approaching year-end holiday season came as the main driver of inflation. Core inflation rose to 3.07% from 3.03% yoy in November 2018 as real demand continue to improve during the year-end festive season
The Jakarta Composite Index (JCI) registered a strong performance in December 2018 with a gain of 2.3%. Both domestic and global factors supported the market; including bottoming out crude palm oil (CPO) price and rising subsidy towards mid-low end population budgeted by the government lifted investors’ confidence towards domestic consumption in 2019. These led to rallies in consumer stocks almost across the board during the month. Additionally, positive development on US-China trade talks, coupled with weakening oil price and some December window dressings further helped sentiment.
Local investors were the main supporter while foreigners registered a net outflow of IDR 5.2tn (US$354mn), partly reversing a strong inflow in November. Most selling was seen in banking names as well as other big cap names. This brings FY-18 outflow back up to IDR 50.7tn (US$3.7bn).
Sector-wise, agricultural was a clear winner with 6.5% gain in response of CPO price rally by 7.1% during the month. Improving demand outlook in December 2018 and January 2019 in anticipation of China’s Lunar New Year, a cut in import tax by India for Malaysian CPOs have predominantly took the headline as the main driver of the recovery
Meanwhile, miscellaneous industries came as the main dragger as Astra International, a heavyweight name in this sector, dropped 3.8% during the month, following profit taking from 8.2% gain recorded in November. The huge trade deficit of USD 2bn reported for November 2018 also took extra pressure towards interest sensitive stocks.
Contrary to Indonesia, market globally experienced sell-off almost across the board. In the US, DJIA dropped 8.7%, which was the worst monthly performance since the global financial crisis. Trade-war uncertainties loomed concern towards growth outlook, further indicated by inverted yield curve. Fed rate hike also remained a moving factor for the market. This was despite of more dovish tone by the Fed, pencilling only 2 hikes in 2019 (from previously 3). The Fed continued to stress economic data remain solid with continuing strong labour market, household spending and economic activity.
Such concern gave some contagion effect to other markets. Uncertainty towards US-China trade talks, and US Fed rate hike, coupled by weak economic data loomed investors’ worry. Nikkei registered one of the worst performances in Asia as Yen continued to strengthen as investors sought for safe haven. This was negative for Japan stocks as most of the companies are exporters and their pricing competitiveness can decline if Yen kept rising. Trade balance also becoming a concern for Japan, as they continue to post trade deficit as energy imports (oil and gas) continue to outweigh its exports, putting concern towards 4Q-18 GDP growth.
We continue cautiously optimistic on the market going into 2019. The falling oil prices indeed have given room on concern towards CAD, which has been the main culprit to Rupiah volatility. Combined with the increased subsidy helping the low-end income population this should give cushion towards consumption, which is the key to Indonesia GDP growth entering political year of 2019. We still see the trade talk between US and China together with Fed’s decision on the rate as risk to our market. As such, volatility remains.
The bond market had a slight correction in December 2018, with the 10-year benchmark yield (FR64) increasing from 7.81% to 7.95%. Negative sentiments came from the development of US-China trade relationship, with unclear signs of agreements between the two countries. The currency also slightly weakened, with IDR depreciating by 0.6% against USD to 14,390 during the month. Trading activities were relatively quiet near year-end.
As expected, the Fed increased its target range for benchmark interest rate by 25 bps to 2.25-2.5%. In its statement, it pointed to a labour market that has continued to strengthen and economic activity that is rising at a strong rate. However, the Fed only signalled two hikes for 2019. Markets also expected fewer hikes going forward, indicated by inverted Treasury yield curve in December, which provided expectation on economic growth and possible recession.
Bank Indonesia decided to keep the 7-day reverse repo rate at 6%. This might be affected by the relatively large inflow to the capital market in the previous month, which could offset the remaining trade deficit. On its statement, BI said that the current rate level remained consistent with the effort to lower CAD and maintain domestic financial market competitiveness, while considering global interest rate trend in the following months.
There were no government bond auctions in December. By the end of the month, foreign ownership in IDR bonds slightly decreased by 0.74% to IDR 893tn. It represented 37.7% of total bonds outstanding, compared to 37.8% in November. For 2019, the target net financing amount is IDR 359.3tn, or 7.2% lower than 2018. Bond issuance is still expected to be the main source of financing.
Going forward, we will continue to pay attention to Fed rate outlook, oil price trend, as well as domestic fiscal and monetary policies.
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