Monthly Market Commentary - August 2019
Indonesia’s 2Q-19 GDP growth printed at 5.05% YoY, slightly dropped from 5.07% YoY in 1Q19, but overall inline with the market expectation. Private consumption saw an acceleration to 5.17% in 2Q-19 from 5.02% YoY in 1Q-19 driven by basic consumptions on the back of robust social spending by the Government. Investment came on the weak side as Gross Fixed Capital Formation (GFCF) came in at 5.01% YoY growth vs. 5.03% YoY in the previous quarter. This was following a contraction in vehicle demand. Going forward, market pencilled in a challenging growth environment. This was on the back of high base in 2H-18 investment data, with private consumption is expected to normalize post impact from the election.
Bank Indonesia (BI) surprised the market by cutting another 25bps on the 7-Days Reverse Repo Rate (7DRRR) and brought it down to 5.50%. The rationales are 1) Inflation remained benign; 2) Domestic financial assets yield/return is still attractive; and 3) Pre-emptive move to push domestic economic momentum in a time where global growth is slowing down. BI continued its dovish stance towards interest rate in support of economic growth going forward.
The Government announced 2020 GDP growth target at 5.3% YoY (from 5.2% in 2019), with inflation at 3.1% YoY, USD/IDR at Rp14,400 (from Rp14,250), oil price at USD 62 and budget deficit at 1.76% to GDP (from 1.93%). Total Government expenditure is expected to accelerate to 8.0% YoY growth in 2020 on its focus towards human capital development where education and healthcare spending saw a growth of 5.7% and 13.0% YoY, respectively. The main driver of total expenditure growth however came from “other expenditure” which increased by 171.0% YoY, reflecting government’s effort in strengthening fiscal buffer on the back of global volatility. On the Revenue side, Government targets total revenue to increase by 9.4% YoY with tax revenue growth expected to grow at 13.3% YoY driven by income tax and value added tax (VAT), while on the other hand non-tax revenue is expected to decline by 7.0% YoY due to BI’s one-off revenue in June 2019.
Indonesia reported a Balance of Payment (BOP) deficit of USD 2.0bn in 2Q-19. Current Account Deficit widened to USD 8.4bn in 2Q-19 (-3.0% of GDP), from US$7.0bn in the previous quarter (-2.6% of GDP) as trade surplus fell to USD 187mn in 2Q-19 from USD 1.2bn. The larger deficit within the Oil & Gas trade balance came as the main culprit, affected by seasonal factor and lower domestic oil production. Financial account surplus depleted to USD 7.1bn in 2Q-19 (vs. USD 9.9bn in 1Q19) following outflow in equities and deficit in other investments.
July 2019 trade deficit was USD 63mn, lower than the market expectation, driven largely by better-than-expected oil and gas exports. Total imports declined by 15.2% YoY (from 2.0% YoY in Jun19) on normalized import of oil and gas due to seasonality.
August 2019 inflation came under control at 0.12% MoM, inline with consensus. This brought the yearly inflation to 3.49% YoY (from 3.32% YoY in July). The main inflation came from Education, Recreation and Sports items that rose a 1.2% MoM on the back of rising tuition fees. Core inflation came at 3.30% YoY an acceleration from 3.18% in July.
JCI started the month in the weak territory following sentiment within the Asia region on US-China trade talks uncertainty. This was coupled by MSCI-rebalancing which resulted an outflow following a down-weight for Indonesia in the index basket. The market however took a relief as the Government announced 2020 Fiscal Budget which taken positively on expectation of economic acceleration in the upcoming fiscal year to a 5.3% YoY growth (from 5.2% YoY in 2019). In the budget, the government also expected an acceleration in spending to 8.0% YoY (vs. 6.3% in 2019). Additionally, BI decision to cut the 7 Days Reverse Repo Rate also lifted investors’ confidence.
Foreign outflows accelerated during the month, reaching IDR 9.3tn (USD 649mn), largely on Indonesia’s weighting reduction in the MSCI index. Average daily transaction value, however improved to IDR 6.8tn (USD 474mn) in the month as the index rebalancing responded with bargain hunting by the active investors.
Basic industry and chemicals outperformed the index for two consecutive months a gain of 5.6% in the August. TPIA and BRPT yet again posted the most gains taking momentum from the lower crude oil price which are positive for their margin. The street talks on potential MSCI inclusion for TPIA in November rebalancing also further boosted the stock price rally. Additionally, industrial paper manufacturer, FASW, also came as an index mover as the new controlling shareholder (SCGP Solutions Pte Ltd) decided on a tender offer that is above closing market price in July. Cement sector, notably SMGR, also took positive momentum in the hope of more benign competitive landscape going forward.
Finance names, in the meantime, dropped by 4.5% MoM as investors’ confidence was deteriorated due to asset quality in anticipation of further global slowdown. Concern on liquidity within the system remain valid with most of big banks loan-to-deposit ratio (LDR) remained >90%.
The US Equities saw big volatility in August as the US-China trade war escalated with looming tariff deadline. On Aug 1st, 2019 the US President announced through its Twitter an additional 10% tariff for the remaining USD 300bn worth of Chinese goods import. The decision was retaliated by China by slapping new tariff on USD 75bn worth of US import goods. The Renminbi touched 7.0 level, the first time since 2008, following the threat.
US economic data continued showing solid number in July 2019, based on Bureau of Economic Analysis. Study from the University of Michigan however indicated deteriorating trend in Consumer sentiment index, dropped to its lowest since October 2016.
During the month, the 10-Year Treasury Note yield also hit below the 2-Year note, accelerating worries towards economic sustainability given the inverted yield. The FOMC meeting is due on September 2019, which will be the key date for the market in regards the Central Bank’s view towards economic view going forward. DJIA 26,403.3 (-1.7%); S&P 500 2,926.5 (-1.8%); NASDAQ 7,962.9 (-2.6%)
Asian equities did not show any better with all indexes ended in the negative territory for the month of July. NIKKEI 20,704.4 (-3.8%); Hang Seng 25,724.7 (-7.4%); Shanghai Comp 2,886.2 (-1.6%); Straits Times 3,106.5 (-5.9%); KOSPI 1,967.8 (-2.8%). Geopolitical tensions and the inverted US Treasury yield curve also took as the main headlines, weighing concern on recession. China’s August NBS manufacturing PMI deteriorated to 49.5 (July: 49.7), suggesting that uncertainty continues to weigh on the Chinese manufacturing sector. The PMI employment index also fell further to 47.9 in Aug (July: 47.1), suggesting further headwinds in employment creation.
The Hong Kong equity market took the biggest hit due to overhang following protest covering the City, at times bringing parts of the city to a standstill (e.g. HK International Airport) and weighing on the economic outlook. HK’s Financial Secretary, Paul Chan, said GDP will grow 0% to 1% this year, down from a previous forecast of 2% to 3%. China is also pushing the development of Shenzhen, including the possibly of granting a privilege in yuan internationalization, a potential threat to Hong Kong as the offshore centre.
From Europe, stock market inched lower on looming worries toward global recession. FTSE 100 7,207.2 (-5.0%); CAC 40 5,480.5 (-0.7%); DAX 11,939.3 (-2.1%). Meanwhile GB Pound plunged on the back of concerns over disorderly Brexit. UK’s Prime Minister, Boris Johnson, suspended the British parliament for more than a month before Brexit, limiting the opposition’s time opponents to derail a disorderly Brexit. The market however expects sizeable stimulus package from the ECB in the upcoming month in anticipation of consistently weak economic data. The unemployment rate in July stayed at the lowest since 2008, while August 2019 inflation was at 1%.
Outlook and Strategy
The impact of the prolonged trade war between the US and China towards global economic slowdown is inevitable, we think. All eyes now on the Fed’s upcoming meeting in September. Its stance on the US economic outlook will be key and hence the decision towards interest rate, whether it could give good cushion to the economic sustainability.
We expect to see continuing market volatility in the coming month especially given rising uncertainties, depressing business and household spending decisions.
The bond market moved sideways in August, with 10-year benchmark yield (FR78) increasing from 7.37% to 7.67%, before returning to 7.31% by the end of the month. In the beginning of the month, negative sentiments were driven by US Fed statement. Although FOMC cut rates by 25 bps, it characterized Fed policy as a mid-cycle adjustment, and signalled the possibility for the cut to be the last cut of the cycle, which was against market expectation.
Meanwhile, US-China trade war escalated as China allowed CNY to devalue and halted US agricultural purchases, followed by US labelling China as a currency manipulator and holding off on a decision to grant US businesses licenses to supply Huawei. This increased perceived risk for weaker growth and expectation of more accommodative Fed policy and provided support to the bond market. US Treasury declined from 2.01% to 1.5%, while USD denominated Indonesian sovereign bond also strengthened, with 10-year INDON29 yield decreasing from 3.16% to 2.85%.
Bank Indonesia (BI) decided to cut the 7-day reverse repo rate by 25 bps to 5.5%. It mentioned that the policy was consistent with low inflation projected below the midpoint of the target corridor (3.5%), attractive returns on domestic financial investment assets that support external stability, as well as a pre-emptive measure to support economic growth amid global growth slowdown. BI expects Current Account Deficit to remain manageable, at 2.5-3% of GDP range for 2019 and 2020. It also noted that Indonesia foreign exchange reserve remained solid at US$125.9 billion in July 2019, equivalent to 7.3 months of imports.
By the end of the month, the government had issued IDR 671 trillion of bonds or around 80% of the full year revised target (assuming budget deficit at 1.93% of GDP). Foreign ownership of IDR government bonds stood at IDR 1,010 trillion, a slight decrease of 0.34% compared to the previous month. This represents 38.5% of outstanding amount, compared to 39.3% in July.
Outlook and Strategy
A downside risk on the economic growth is currently prompting an accommodative monetary stance. Valuation also remains attractive with IDR bond real yield among the highest globally.
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