Market Commentary - 4Q 2021


Covid19 cases was under control despite more mobility relaxation was implanted. Indonesia reported 4,292 active cases by the end of 4Q21 as compared to 36,141 cases at the end of 3Q21. Many cities were at PPKM level 2 and below whereby at level 1, offline schools are allowed at 50% capacity; modern and traditional market are allowed at 100% capacity; and restaurant, gym, place of worship, wedding receptions are allowed at 75% capacity. Public transportation is allowed at 100% capacity within cities at PPKM level 2 and below. The government instructed a lower PCR and antigen testing price, as per President Jokowi's instruction, and answered publics’ feedback of pricy test for domestic travel. Approaching the year end, the government reported the first local transmission of omicron cases. The government required Covid19 patient with omicron variant to be isolated in the dedicated hospital and did not allow home quarantine.

11M21 budget realization showed a higher revenue and lower deficit. Total revenue accelerated by +19.4%YoY, reflecting robust economic rebound, with income tax +15.1% and VAT +19.8%. Spending was controlled with only +0.2%YoY increase. Fiscal deficit showed an improvement at -3.6% of GDP vs -5.6% in 11M20. The tax office reported a solid YTD 18 December tax collection that has reached 96% of FY21 target. Large tax office has surpassed the FY21 target and YTD realization recorded at +14%YoY with contribution from Income tax +18%YoY and VAT +6%YoY. The tax office was optimist to surpass the target as economy recovery momentum was on track.

Indonesia 3Q21 GDP was recorded at +3.5%YoY vs +7.1% in 2Q21. The slowdown was expected as the second wave Covid19 ravaged the nation. Among GDP component, private consumption decelerated the most at +1.03% in 3Q21 vs +5.96% in 2Q21. Interestingly, machinery demand was solid with double digit growth, which may indicate an expansionary mode in the coming quarters.

Indonesia November trade surplus recorded at USD3.5bn vs USD5.7bn in October. A lower MoM surplus was attributed to higher import that jumped 52.6%YoY. A higher import was lifted by oil imports that jumped 196%YoY as mobility improved. Raw materials and consumer goods booked a higher growth which indicated a higher economic activity. Export grew 49.7%YoY which was still mainly driven by the commodity. The main export destination countries were to US, EU and China for the month of November. The MoF was optimistic that FY21 budget deficit to reach 5.3-5.4% or lower than initial projection of 5.8%. The improvement to continue in FY22 whereby The MoF estimated the budget deficit to decline to 4.1% supported by higher revenue from commodity.

3Q21 BoP recorded a massive surplus of USD 10.7bn vs -0.5bn in 2Q21, which was the largest surplus since 2009. Both Current account (CA) and Financial Account (FA) improved and contributed to the surplus. The CA reached +1.5% of GDP driven by sizeable trade surplus from jump in export. The export value increased dramatically due to higher commodity price (Coal and CPO) and iron & steel export. The FA surplus expanded to USD 6.1bn vs USD 1.6bn in 2Q21. IMF’s SDR of USD 6.3bn contributed the most to the surplus. Portfolio surplus narrowed to USD 1.1bn from USD4.4bn due to net foreign outflow in the bond market.

Bank of Indonesia maintained the policy rate unchanged at 3.5% for the 10th consecutive month. BI signalled that its monetary stance to be pro stability FY22 with other policies (macroprudential, payment system, and financial deepening) to remain accommodative in supporting economic recovery. December inflation recorded at +0.57%MoM resulting FY21 inflation of 1.87%YoY, below BI's lower inflation target range of 2%. Food prices was the main contributor to Dec. inflation with 0.41ppt contribution. Indonesia November foreign reserve increased to USD 145.9bn vs 145.5bn in the month before. BI November consumer confidence index increased to 118.5 vs 113.4 in October 2021. The reading, which was the highest since January 2020, showed an improvement in all category from perception of current situation, job availability to economic outlook. Higher commodity prices have led CCI in ex Java to grow stronger compared to Java region.

Indonesia 3Q21 total investment decelerated to +4%YoY vs +16%YoY in 2Q21. The total investment amounted to Rp659tn or 73% of the FY21 target. Total FDI declined by -4%YoY from +18%YoY in the previous quarter. Second covid wave and mobility restriction in Indonesia was the likely cause of slower FDI. FDI contraction was seen in secondary sector (base metal, machinery and chemical) while some improvement was booked in manufacturing sectors (food processing and paper & printing). FDI in mining and plantation posted a solid +65%YoY growth thanks to high commodity prices. Investment from US remained robust at +83%YoY whereas China's dropped by 45%YoY due to slowdown in its GDP growth. DDI grew by 10%YoY in 3Q21 with substantial improvement in primary sector (mining, forestry and plantation). Domestic investment in secondary sector -15%YoY led by chemical and pharmaceutical sector.


Local Market

JCI gained 4.7% QoQ to 6,581. The index rally was supported by the foreign inflow of Rp11.4tn in the quarter, which mainly came on the beginning of the 4Q. The index reached its all times high at 6,754 on a series of positive news flow from improving macro data to manageable covid condition in the country. Cyclical and reopening stocks had one of their best months as Covid19 cases in Indonesia continued to decline and PPKM were relaxed. Additionally, higher soft and hard commodity prices was a tailwind for Indonesian economy. The index corrected upon the discovery of new variant with numerous mutations. Furthermore, the market was trading sideways as investors waiting on the side-line amid the announcement of omicron variant local transmission. Investors were also divided on the higher inflation reading between better economic outlook and faster than expected policy rate increase.

The best performing sector was IDXTransportation (+33%QoQ) led by shipping company that enjoyed a surging demand as economy resumed. IDXEnergy posted a strong 14%QoQ gain supported by higher commodity price and volume demand as global activities improved. Foreign flow, improving macro, and reopening provided a tailwind for IDXFinancial to book a solid quarterly gain of 7.9%. The worst performer was IDXProperty with -5.7% quarterly decline as investors took profit after their strong performance in 3Q.

Global Market

For the 3 months period, the US equity market performed strongly with DJIA/S&P500/Nasdaq booked +7.4%/+10.6%/+8.3% respectively. The US market booked a positive gain at the beginning of the quarter as the good results surprised investors amid higher inflation, labor shortage and rising energy cost. However, investors took profit on the middle of the quarter as WHO labelled omicron as variant of concern. Investors reduced their position and some switched into growth names as opposed to cyclical or value stocks. Investors were risk on again after digesting data that omicron was not as severe as previously reported. S&P closed at record high with reopening and travel stocks leading the rally. Strong US data supported the market with weekly jobless claim for the week ended Dec. 25 totaled 198k and remained to its lowest level in more than 50 years.

Asian market had a mixed performance with NIKKEI 28,971.71 (-2.2%); Hang Seng 23,397.67 (-4.8%); Shanghai Comp 3,639.78 (+2.0%); Straits Times 3,123.68 (+1.2%); FTSE Malay KLCI 1,567.53 (+1.9%); KOSPI 2,977.65 (-3.0%). China 3Q21 GDP growth decelerated at +4.9%YoY vs +7.9%YoY in the previous quarter. The economic slowdown was due to power shortage and lower fixed asset investment. People's Bank of China announced reserve requirement ratio cut to boost growth amid the pandemic. The major tech names declined as some of the companies slashed the revenue guidance on softer economic outlook. Japan November CPI recorded at +0.5%YoY, the highest pace since in the past 2 years, due to surging fuel price. Japan November retail sales increased 1/9%YoY vs +0.9%YoY in October as economic activity improved on easing virus concern.

FTSE 100 7,384.54 (+4.2%); CAC 7,153.03 (+9.7%); DAX 15,884.86 (+4.1%). European index had a positive performance at the beginning of the month despite concern on rising inflation and supply chain bottlenecks. The better-than-expected earnings results have lifted investors' confidence. The indices declined sharpy at the middle of the quarter, with travel and leisure stocks dragging the index the most, due to concern over a new variant. However, a surge of covid cases in December did not stop Santa Claus rally in the European Market. The overall market sentiment was positive as New UK study found that the risk of hospitalization for omicron was 1/3 of delta variant. Furthermore, the study showed that covid vaccines reduce the risk of hospitalization from omicron and booster provided the best protection. The Bank of England raised policy rate from 0.1% to 0.25%.

Equity Outlook and Strategy 

We are positive on equities for 2022 as valuation compared to peer equity markets remains attractive while the fundamental reform story remains intact. Potential listings of new economy stocks in the pipeline would also help attract flow into the equity market. Indonesia’s COVID-19 conditions remained stable despite the global Omicron outbreak. Improving conditions would be a booster for the equity market. However, we must remain cautious and make sure that the condition does not worsen again. We think that strict border control may help prevent large scale mobility restrictions and, hence, avoid economic downturn. inflation and tightening policies are risks for 2022.

Despite the spread of the Omicron variant, global equity market remained relatively stable towards the end of 2021. For Indonesia, slight correction occurred after strong rally in the previous months as foreign investors posted some outflow towards the end of the year. However, the JCI index remained steady and managed to close 2021 with solid positive gain. JCI is still trading at discounts compared to developed markets and select Asian peers, notably India. Despite similar macro backgrounds, India trades at a high premium valuation compared to Indonesia. Hence, the Indonesian equity market remains lucrative to investors. Blue chip names trade at 10% discount compared to mid-to-small cap names as seen from the performance of the LQ45 and IDX80 indices compared to the JCI index. Meanwhile, the volatile Chinese market caused by series of government interventions in its private sector may also cause asset rotation from China to other countries including Indonesia.

As inflation continues to creep up and the Fed has announced a more hawkish stance for 2022 policies, Bank Indonesia’s policies for the year may also impact the equity market. The central bank would need to monitor the inflation in the country along with the Fed’s policies. We think that inflation in Indonesia will start to climb up in 2022 though at a more benign pace compared to the US due to lack of demand pull inflation. However, to maintain healthy real rate, Bank Indonesia would need to closely follow the Fed’s tapering and rate decisions. We think that Bank Indonesia would start to raise rate towards the end of 2022 after a series of asset purchase cuts and reserve requirement rate adjustments.

Fixed Income

Indonesia 10 years government bond yield rose to 6.38% from 6.26% at the end of September. The bond yield declined as low as to 6.06% on October as local liquidity remained ample and the fiscal deficit was narrowing; thus, potentially reducing government’s bond issuance FY21. However, yield started to rise after The Fed chairman sent a hawkish tone with potential faster tapering amid the discovery of new covid19 variant. The Fed fastened its bond buying program reduction to USD30bn less in December and USD60bn less in January 2022. After the completion of tapering, the Fed expected to adjust the interest rate to combat inflation. The projections showed potential 3x increase FY22. President Biden renominated Jerome Powell to chair the Fed and appointed Lael Brainard as vice chairman. The president applauded Mr Powell's leadership during covid19 crisis and confident that Mr Powell and Ms Brainard would succeed in keeping inflation low, prices stable, and bringing higher employment to make US economy stronger. Indonesian USD denominated 10-year yield (INDON31) closed at 2.15% from 2.32% in 3Q21. Based on bond flow data as of Dec. 31, Foreign ownership in bond was at 19% with total outflow Rp27.1tn MTD, outflow of Rp67.76tn in 3Q21, and outflow of Rp82.6tn YTD.

Fixed Income Outlook and Strategy 

Higher inflation and rising interest rates would pressure the bond market. Monetary reversal policies and hefty valuation would limit upside to the bond market at this juncture. We think that low foreign ownership of government bonds at about 21% would limit downsides in the bond market while high real yield and low inflation in Indonesia continues to attract foreign investors. Additionally, the government’s plans to trim down issuance and buyback some bonds would also help reduce supply risks while liquidity remains ample. Hence, should market get corrected, foreign investors may look to re-enter at attractive entry points.

Market friendly policy adjustment is crucial at this juncture. An abrupted change in policy will caused a tantrum we have seen back in 2013 again. While global central banks are going to be facing difficult challenges, Indonesia interestingly has a rather different environment. Strong external balance, positive FDIs, low credit growth, and subdued inflation made Bank Indonesia has enough room to maintain its current policy direction until at least 1H22. The government fiscal balance is also favorable because of better revenue this year. Therefore, it translated into a lower bond issuance until year end. Nevertheless, markets will monitor the progress of burden sharing with Ministry of Finance and not expecting the program to be extended beyond 2022.  



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