Monthly Market Commentary - January 2021


BKPM reported 4Q20 FDI of 9.9% YoY, higher than in 3Q20 at 5.3% YoY. Hence, FY2020 FDI posted growth of 1.6% YoY, the first positive growth since 2017. 4Q20 FDI growth was driven by tertiary sector such as transportation and communication. Investment realization in the basic metal industry from China in Maluku also pushed the growth and contributed the most around 19.3% of total FDI. Overall, FDI from Asian countries dominated in 2020 with basic metal industry posting the most contribution. Realization of backlog investments also helped support the FDI during the year. Meanwhile, 4Q20 DDI growth slowed down to 0.2% YoY from 2.2% YoY in 3Q20 driven by investments in construction sector. On an annual basis, DDI grew by 7% YoY in FY2020 compared to 17.6% in 2019 due to the COVID-19 pandemic. The government targets overall investment growth of 9% YoY for FY2021 to USD64bn, a rebound from 2.9% YoY in FY2020.

Indonesia reported monthly inflation of 0.26% MoM or 1.55% YoY in January, a slowdown from 1.68% YoY in December. Food inflation was the main driver for the overall inflation. Transportation sector posted deflation during the month driven by air transport deflation while toll road price hike gave some support and offset the fall in air fares. Core inflation slipped from 1.60% YoY in December to 1.56% YoY in January.

Indonesia’s December 2020 trade balance came at a surplus of USD2.1bn, slightly lower than November’s at USD2.6bn. Exports grew by 14.63% YoY driven by strong coal and CPO prices as well as iron and steel exports. Meanwhile, import contraction was at -0.47% YoY, much narrower than street’s expectation of -12.96% YoY. The narrower import contraction is mainly due to strong oil price which has breached above USD50/bbl as well as machineries imports.

The government has released an unaudited fiscal realization for 2020 where budget deficit reached 6.09% of GDP compared to the target of 6.34%. Total revenue fell 16.7% YoY and reached 96.1% of target. Though tax revenue missed at 91% of target due to weak domestic demand and tax incentives, non-tax revenue beat target at 115% achievement rate supported by commodity price rally towards the end of the year. Meanwhile, government spending grew by 12.2% YoY and reached 95% of target driven by social spending due to PEN realization and material spending driven by COVID-19 related spending by the Ministry of Health. PEN realization reached 83.4% of target driven by social safety net and SME support. Meanwhile, corporate financing saw a boost in December due to the government’s capital injection to SOEs and SWF.

Forex reserve closed at USD135.9bn as of December, an increase from USD133.6bn in November due to government’s foreign loan withdrawal. Bank Indonesia maintained its policy rate at 3.75% in January and stated that it will maintain its accommodative monetary policies. USD/IDR closed at IDR14,030/USD which appreciated by 0.1% MoM.


Local Market

JCI index started the year strong initially but ultimately closed with a negative return of -2.0% MoM in January. However, foreign investors booked inflows of USD777mn (IDR10.9tn) into the equity market, much larger than the inflows in November. Market started off in positive territory as investors blew sigh of relieve as the government maintained PSBB transition despite rising COVID-19 cases over the holiday season. Sentiments were boosted after the Democratic Party won control at the US Senate after the last poll in Georgia, hence, indicating the Biden administration to be a Democratic Sweep which is overall positive for EM countries such as Indonesia. President Biden and Vice President Harris were then officially inaugurated later on in January. President Biden is already pushing for another stimulus of about USD2tn to combat impacts from COVID-19 where the soon-to-be Treasury Secretary, Janet Yellen, also mentioned that stimulus to help the unemployed and small businesses would be effective. Investors’ mood was also uplifted as Indonesia has started its vaccination process with President Jokowi being the first to be vaccinated. The Ministry of Health also mentioned that they are able to get some doses of vaccine from COVAX earlier than expected. The government has also been in talks with the private sector for distribution of vaccines through employers, aiming 20-30mn people vaccinated at a cost of IDR500,000-1,000,000/person. To curb infections in high risk areas, the government imposed stricter mobility restrictions called PPKM in Java and Bali as positivity rate has breached 30% at one point nationwide while hospital occupancy rate reached 87%. The goal is to return the daily new case numbers back to November 2020 level. Meanwhile, Indonesia reported an unaudited fiscal deficit of 6.09% of GDP, slightly narrower than the government’s target. PEN realization reached 83% of target in 2020 where the unused financing will be kept for PEN in 2021 mainly for vaccine and social safety net. The government mentioned that it plans to increase the budget allocation for PEN 2021 by IDR197tn as the pandemic is still ongoing. The funding will be reallocated from this year infrastructure budget as well as unrealized 2020 stimulus and financing surplus. Oil price saw continuous support in January after Saudi Arabia announced that it will cut its production by another 1mn barrels per day. Towards the end of the month, we continuously saw market corrections as investors, mainly retail investors, took profits. Market was also impacted by noises on global concerns on rising COVID-19 cases and spread of the new strain in Europe and the Americas. The corrections, hence, erased the gain during the month.

The Jakarta Trade, Services and Investment Index was the winner in January with 4.4% MoM gain. The main index supporter came from EMTK after the company announced decision to do stock-split to improve its liquidity. Moreover, market seems to perceive the company to be a tech proxy as EMTK owns shares in two major start-ups, Bukalapak and Dana. In addition, MIKA also became one of the main index drivers as the company is seen as a proxy to rising COVID-19 cases and is among the beneficiaries after number of daily cases spiked following the holiday season. Top 5 drivers were: EMTK (+35.7%), DCII (+1,602.4%), SRTG (+45.8%), MIKA (+6.2%), and TECH (+197.5%).

Global Market

The US market reported mixed performances in January as the Democratic Sweep would ease President Biden’s new legislation and clear up gridlock risks, but, the spread of new COVID-19 variant may dampen investors’ appetite towards high risk assets. DJIA 29,982.6 (-2.0%); S&P 500 3,714.2 (-1.1%); NASDAQ 13,070.7 (+1.4%). Meanwhile, President Biden announced plans for the next stimulus package of USD1.9tn which is currently under discussion. The Fed stated that it will maintain the policy rate and pledged to continue buying bonds of about USD120bn per month as the pandemic ensues. The central banks stated concerns on high unemployment in the service sector and low inflation. Meanwhile, the US reported its 4Q20 GDP growth at 4% YoY, thus, bringing its FY2020 GDP growth to -3.5% YoY. Towards the end of the month, market sentiments were dragged by day trades hatching stock bets that roiled hedge funds which prompted market volatility.

The Asian markets mostly booked positive returns in January as investors readjust the 2021 economic recovery. NIKKEI 27,663.4 (+0.8%); Hang Seng 28,283.7 (+3.9%); Shanghai Comp 3,483.1 (+0.3%); Straits Times 2,902.5 (+2.1%); FTSE Malay KLCI 1,566.4 (-3.7%); KOSPI 2,976.2 (+3.6%). However, investors remain cautious on the spread of the new COVID-19 variant which may put the pressure on the market. China’s manufacturing PMI fell MoM in January at 51.3 from 51.9 in December due to overall weak demand. China also reported 6.5% YoY GDP growth in 4Q20 which brought its 2020 GDP growth to 2.3% YoY. Infrastructure push from the government and resilient trade performance managed to support the country’s GDP growth. 

Concerns on vaccine delivery from Astra Zeneca along with the spread of the new COVID-19 virus variant found in the UK puts pressure to the European markets in January. FTSE 100 6,407.5 (-0.8%); CAC 40 5,399.2 (-2.7%); DAX 13,432.9 (-2.1%). The spread of the new virus variant prompted the UK to tighten border controls while other countries are banning travels to and from the UK. France has also indicated plans for another lockdown as cases of COVID-19 continues to increase. Meanwhile, the ECB has indicated that it will maintain loose monetary policy and keeping rates close to zero while the asset purchase program continues as the pandemic continues.

Equity Outlook and Strategy 

We think that the Omnibus Law implementation, Sovereign Wealth Fund execution, and vaccine roll-out would continue to serve as catalysts for the equity market during the year. The Indonesian equity market is also still a laggard compared to other countries’ while foreign investors, all-in-all, posted strong inflow in January indicating there are still appetite for Indonesian equity from foreign investors. Risks to the equity market may come from the rising cases of COVID-19, spread of the virus’s new variant, any adverse news on vaccine, as well as volatility in the currency.

In the past few months, retail investors have been among the movers of the equity market as ample of liquidity led them to seek return in riskier assets such as equities. As retail investors have sold down massively in the last two weeks of January, we think that eventually they will start to return to the market and start to bottom fish. Moreover, foreign sentiments continue to improve as the country’s reform through the Omnibus Law and Sovereign Wealth Fund is still appealing to them. We also have seen FDI rising for the first time in 3 years in 2020 despite the ongoing pandemic. We think that the Omnibus Law would be able to further boost appetite for foreign investors. As the government has also been pushing for vaccination, which would be mostly rolled out towards the second half of the year, we think this would further pave the way to growth recovery and, hence, further upside to the equity market.

Therefore, we would need to continue to monitor the risks that may derail economic growth. One risks would be spread of COVID-19 and the new variant. As market has already priced in rising cases and availability of vaccine, the risk would come should there be another strict lockdown or if there are negative news on vaccine distribution or efficacy. Another risk to be monitored is movement of the currency. The Rupiah has rallied strong in 4Q20 given the incoming flow to the bond and equity markets. Guidance from major central banks so far is that they will still maintain accommodative monetary policies by keeping rates low and maintaining current level of asset purchases. We would need to monitor as well on President Biden’s policies and what the administration would look like. Domestically, we think that with overall improving trade balance supported by diversifying exports beyond coal and CPO as well as imports that is still under pressure. Hence, CAD would still be benign for this year.

Fixed Income

The bond market started the year with negative return in January as the 10-year government bond yield rose from 5.886% to 6.200%. Foreign investors recorded net inflow of USD635mn into the bond market in January. Profit taking actions as well as narrowing yield spread with US Treasury coupled with rising concerns on COVID-19 caused the bond market to be under pressure. The US Treasury yield rose from 0.92% to 1.06% while the USD denominated Indonesian 10-year yield (INDON31) closed at 2.05% at the end of January.

The year started with continuation of foreign inflows into IndoGB. Inflation for 2020 was also reported lower than the government’s target of 2% YoY at 1.68% YoY to be exact. Auctions continued to garner strong bids and larger issuance as the government’s target for the year is higher due to lack of burden sharing scheme with Bank Indonesia for this year. Yield started to turn upwards due to concern of rising COVID-19 cases in Indonesia and around the world. Investors were also concerned as Java and Bali are put into PPKM due to rising cases. After the announcement of a Democratic Sweep in the US, the US Treasury yield rose above 1% for the first time in almost a year which caused the Rupiah to slightly depreciate as the USD strengthened. However, the US Treasury yield eased back down as Fed officials pushed back on possibility of early taper while market is anticipating more spending from the government to support the economy.

Yield continued to climb up in the middle of January after the rise in US Treasury yield and DXY index rebound. Moreover, slower incoming bids in auctions during the second half of the month added pressure to the bond market. Despite so, local and foreign investors continued to support the bond market. Indonesia also reported another trade surplus in December. Retail investors also has been supporting the market as ample liquidity push retail investors to seek returns in the bond market as well. Hence, we note some rebound in bond prices towards the end of January. Meanwhile, Bank Indonesia mentioned that it will maintain its policy rate at 3.75% in January while the Fed and ECB both indicated no plans for rate hike and asset purchases easing anytime soon.

In terms of issuance, the government saw solid demand at the auctions during the month. As of January, the government managed to issue about IDR172.8tn of bonds YTD. All-in-all, YTD bond issuance has reached 11.3% of the government’s FY2021 issuance target. As of end of January, foreign ownership of IDR government bond has reached IDR985.4tn, or 24.8% of total outstanding amount.

Fixed Income Outlook and Strategy 

We think that the bond market has rallied well in 2020 and, thus, offering limited upside for 2021. However, as yield has steepened and foreign investors’ appetite picked up, we think that they will remain to be supports for the longer tenor series. Foreign ownership in IndoGB has fallen to 25% while real yield remains attractive with stable currency. Therefore, we think that foreign investors will still keep IndoGB among their top picks for EM sovereign bonds. The bond market saw correction in January due to political uncertainties in the US ahead of the presidential inauguration, rising US Treasury rate, and slowdown in bids during the latest auctions which pushed up yield. We think that this would create an attractive entry point for foreign investors who missed the rally.

One risk to the bond market is the high supply level for 2021 and whether or not demand could keep up. As the government plans to frontload issuance in the first half of the year, concerns arise on the incoming supply of the period. Moreover, investors are also concerned due to the slowdown in bids during the last auctions in January. Hence, we think that yield may need to be pushed up should the bid-to-ask ratio remain low in February and March. However, in the same time, IndoGB is still appealing to foreign investors and liquidity is still ample which should be able to give support to the bond market. Bond investors are likely to be monitoring the government’s plan for fiscal budget financing and progress on Omnibus Law and Sovereign Wealth Fund. Alternative financing such as multilateral loans and FDI would help ease down incoming bond supply and help support the market.



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