Monthly Market Commentary - May 2022


Indonesia did not see the daily new covid case rose exponentially after the Hari Raya holiday. High vaccination rate and herd immunity has taken an active role in combating the community spread. The government increased the PPKM status in Jabodetabek to level 1. Restaurant, movies, mall, and wedding reception capacity can be at 100%.

Indonesia 1Q22 GDP booked at 5.01%YoY. Private consumption picked up by 4.3%YoY vs 3.6%YoY in 4Q21 despite omicron wave in 1Q22. Investment increased 4.1%YoY with machinery and equipment rose 19%YoY while building investment was still soft at 2.9%YoY.

Indonesia 4M22 fiscal recorded a surplus of Rp103.1tn (0.58% of GDP) and was accelerated compared to a surplus Rp10.3tn in 3M22. Total revenue grew 45.9%YoY to Rp 853.6tn thanks to elevated commodity price, higher economic activity, and tax voluntary disclosure program. Total revenue reached 46.2% of FY22 target and much higher than historical 8 years average of 28.5%. Spending increased 3.8% YoY to Rp 750.5tn or 27.7% of FY target.

Indonesia 1Q22 BoP recorded a deficit of USD 1.8bn vs 4Q21 deficit of USD 0.8bn. The financial account booked a deficit of USD 1.7bn due to larger overseas placement and net foreign outflow of Indonesia government bond of Rp USD 2.9bn. The current account recorded a surplus of 0.1% of GDP thanks to significant surplus in trade balance of USD 11.1bn. The government lifted CPO export ban as domestic cooking oil price has softened and to support local CPO farmers.

BI kept the policy rate unchanged at 3.5%. The central bank to increase the Reserve Requirement Ratio (RRR) by 100bps to 6% in June 2022, 150bps each in July and September 2022 to 9%. April CPI increased 0.95%MoM/3.5%YoY. Inflation was driven by food and transportation at 0.46ppt and 0.29ppt respectively on seasonal demand and higher Pertamax price. The wholesale inflation increased 0.97%MoM/4.2%YoY led by manufacturing sector. Indonesia March retail sales increased 9.3%YoY from +12.9% in February. It increased 2.6%MoM after 4.5% MoM dropped in February.


Local Market

JCI declined by 1.1% in the past one month with around Rp 3.5tn net foreign sell. The index was deeply corrected after the Hari Raya holiday due to foreign pressure. The global concern on central bank tightening, persistently high inflation and higher global political tension triggered the investor to took profit in Indonesia market. The market slowly recovered and trimmed its losses as Indonesia macro data continued to be solid, no jump in covid cases and CPO export ban was lifted. The Best Index performer was IDXTransportation (+21.8%) as economic activity resumed and mobility was higher. IDXEnergy (+8.1%) posted a solid performance lifted by high coal prices amid the geopolitical tension. IDXNonCyclical Consumer (+6.8%) was the third best performer as the economy were on its path to the old normal. IDXTechnology (-11.4%) dragged the index along with the global technology names weakness due to policy rate tightening.

Global Market

DJIA 32,990.12 (+0.0%); S&P 500 4,132.15 (+0.0%); NASDAQ 12,081.39 (-2.1%). The US indices weakened on the first weeks of the month as concern of high inflation, slower economic growth, and a potential of recession continued to pressure the market. The condition was exacerbated once investors found that some consumer and retailers 1Q earnings were hit by higher fuel and labor cost. US 1Q22 GDP contracted 1.5%, lower than consensus expectation of 1.3%. Stocks rebounded after US reported April CPI increase 8.3%YoY (higher than consensuses forecast at 8.1% yet slightly below than previous reading at 8.5%). Yet The street was still cautious as Fed Chairman Mr Powell mentioned that he could not guarantee soft landing for the economy. The indices booked a strong weekly performance at the end of the month as solid corporate earnings and slower inflation reported lifted the mood. The core personal consumption expenditure index increased 4.9% in April from 5.2% on the previous month.

NIKKEI 27,279.80 (+1.6%); Hang Seng 21,415.20 (+1.5%); Shanghai Comp 3,186.43 (+4.6%); Straits Times 3,232.49 (-3.7%); FTSE Malay KLCI 1,570.1 (-1.9%); KOSPI 2,685.9 (-0.3%). Japan 1Q22 GDP declined 1%YoY which was narrower than consensus expectation of 1.8% contraction. Covid19 restrictions and higher commodity prices were the culprit for the growth decline. China market was weak at the beginning of the month due to lockdown in some of its cities. The market rebounded as the cities gradually easing its mobility restriction and China kept its 1 year benchmark rate unchanged at 3.7% yet cut the 5 years loan prime rate by 15bps to support the economy. The technology names jumped at the end of the week as some of the ecommerce and social media companies reported a strong 4Q earnings.

FTSE 100 7,607.66 (+0.8%); CAC 40 6,468.8 (-1.0%); DAX 14,388.35 (+2.1%). Bank of England increased interest rate by 25bps (taking the base interest rate up to 1%) to the highest level since 13 years to combat inflation. The bank expected GDP to fall in the 4Q this year and inflation to reach 10% in autumn due to Russia's invasion and China's lockdown. EU proposed a gradual ban of Russian oil and removed Russia’s largest bank from the SWIFT system. UK April inflation jumped 9%YoY, highest since 1989, as food and energy prices soared. German April producer price index jumped 33.5%YoY driven by high energy cost. Eurozone May Flash PMI recorded at 55.8, slightly ahead of estimates, indicating that the economy remained resilient. German 1Q22 GDP grew 0.2% on the back of strong construction and machinery investment. UK temporarily imposed a targeted energy profits levy for oil and gas companies, because of surging prices, to ease the burden in low-income household. The new 25% tax on the profits of energy producers may collect USD6.3bn from the sector.

Equity Outlook and Strategy 

We remain positive on equities as the fundamental reform and recovery story remains intact. However, we are cautious in the short term due to risk form the Ukraine-Russia tension and potential rise of inflation in Indonesia. Any additional sanctions on Russia may add global inflationary pressure and risk to derail growth. Covid cases are more manageable in Indonesia at the moment with lower hospitalization and mortality rates compared to during the Delta outbreak. Government’s stance seems to also be heading towards continuation of reopening and economic recovery. However, we need to monitor the condition post Lebaran holiday season.

Following the global equity sell-off as the Fed raised interest rate by 50bps in May, the Indonesian equity market also took a break from its gain streak in May. The pressure mostly came from foreign investors sell-off as local investors have already taken profit before the Lebaran holiday. We are seeing locals giving support to the market after the Lebaran holiday while foreign flow is relatively stable with some inflows and outflows. Market came back up with supports coming from the MSCI index rebalancing which brought up Indonesia’s weighting from 1.6% to 1.9%. We believe that foreign investors are still waiting for the right momentum as many are still cautious on the inflation figures particularly in Indonesia which is still relatively low even after the Lebaran holiday. Despite so, we expect 2Q22 GDP growth to be strong due to full Lebaran effect and high commodity price. The strong commodity price also has given a cushion to the Rupiah as the USD appreciated with foreign investors seeking safe haven asset to flee to.

Our global economist team recently downgraded our global GDP growth forecast from 3.8% to 2.7% for 2022 and from 3.0% to 2.7% for 2023. The downgrade is due to expectations of high commodity price environment, high inflation, and risk from China’s zero covid policy. Hence, we foresee risks of economic slowdown particularly in Europe and US. On the monetary front, our team expects the Fed to continue with its hawkish stance this year and increase rates. However, risks of economic slowdown in the US may cause the Fed reverse its policy by end of 2023. With slower developed market, we think that investors would still monitor emerging markets and focuses on markets with inflation buffer who are also beneficiary of high commodity price. Hence, we think that Indonesia would remain among the preferred market for foreign investors. However, we also need to monitor developments in China as it slow Chinese economy and prolonged zero covid policy may pose as risk to the Indonesian economy.

Fixed Income

Indonesia 10 years government bond yield increased 5bps to 7.04% compared to the previous month. In comparison, the US 10-year treasury note decreased by 8.1bps to 2.853%. The US treasury yield declined after the inflation data was announced; the street saw that inflation was peaking despite it was higher than expectation. Some asset class rotation from equity to FI supported the yield lower as well. Fed minutes showed that the officials were planning to increase the policy rate by 50bps each in the next couple of meetings. Based on DMO bond flow data as of May 27, Foreign ownership recorded at 16.5% of the outstanding and outflow of Rp100.1tn YTD. Indonesia 10 years USD global bond yield at 3.92%. IDR slightly weakened to 14,581.

Fixed Income Outlook and Strategy 

Higher inflation and rising interest rates would pressure the bond market. In addition, the current tension in Ukraine may push up commodity price and inflation. We think local investors will be the main supporter of IndoGB in the near term while foreign investors would be in defensive mode as inflation risk remains. One risk is the fact that banks may start to grow their loan once again as the economy recovers, hence, reducing the needs for them to keep government bonds as reserve. We think that low foreign ownership of government bonds at about 18% would limit downsides in the bond market while high real yield and low inflation in Indonesia continues to attract foreign investors. Hence, should market get corrected, foreign investors may look to re-enter at attractive entry points.

We have started to see the bond market stabilizing after weeks of pressure as the 10 year government bond yield slightly eased down to about 7.0% from its peak of 7.4%. However, we think that the easing yield is due to trading momentum as sentiments in the bond market is still bleak with risk of inflation and monetary reversal. Foreign investors are relatively still risk-off with the bond market and, hence, we think that long end bonds would still remain under pressure. For now, we are focusing in the short end bonds as we think that the structural market turnaround would still need time. We think that the bond market will continue to be volatile in the next couple of months as investors mostly trades.



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