Monthly Market Commentary - July 2019
From domestic macro, Bank Indonesia (BI) decided to cut its 7-Days Reverse Repo rate by 25bps to 5.75% in July, in line with market expectation. The decision came in response to their target to push economic growth momentum while maintaining domestic stability including inflation on Balance of Payment (BoP) condition. During the meeting, BI also highlighted the possibility to take further accommodative policy in the future in the form of non-interest rate measures.
Government’s total revenue as per Jun-19 reported an increase by +7.8% YoY with Non-Tax Revenue (+18.2% YoY) came as the main driver of the growth, compensating Tax Revenue of which grew modest by +5.4% YoY. The strength in Non-Tax Revenue was boosted by “Separated State Revenue” of which grew +93.5% driven by BI’s surplus from its FX stabilizing operations. Total expenditure, meanwhile, increased by +9.6% YoY, mainly from consumption-related spending, with social spending jumped the most by +56.3% YoY as of Jun-19. As a result, budget deficit was recorded at -0.84% to GDP in Jun-19 (vs. -0.74% to GDP in Jun-18).
Indonesia posted a trade surplus in Jun19 amounting USD196mn, much below the street expectation of USD658mn. Total exports declined by -9% YoY in Jun-19 with commodity names, i.e. Gas, Oil, Coal and CPO came as the main dragger both in volume as well as price. Meanwhile total Imports saw an increase by +2.8% YoY with Machineries, Iron and Steel and Consumer Goods driving the figure. Economists, however, still giving benefit of doubt and expects 2Q19 Current Account Deficit still manageable at below 3% of GDP.
During the month, President Jokowi signed a new regulation in regards to Taxable Income and Payment on Income Tax. In the regulation tax incentives will be given to the following:
1) Labour-intensive businesses that provide fresh investment and produce new inventions;
2) Businesses that carry-out activities in improving human capital; and
3) Businesses that conduct research and development. Further stimulus is also hinted to come, including revision on negative investment list, widen the tax holiday scheme and reduction of corporate income tax.
Jul-19 CPI was recorded at +0.31% MoM, slightly above the consensus expectation of +0.26% MoM, bringing the yearly CPI to +3.32% YoY (from +3.28% YoY in Jun-19). Foodstuff items came as driver of which saw an increase by +0.8% MoM. Overall core inflation decelerates to 3.18% YoY (from 3.25% YoY in Jun-19) from normalizing “Lebaran” holiday.
JCI continued its strong performance in July, closing with a decent +0.5% monthly gain, cheering Bank Indonesia’s (BI) decision to finally cut its 7-Days Reverse Repo Rate by 25bps to 5.75%. BI also highlighted the possibility to take further accommodative policy measure in the short term. Rupiah strengthened by 0.75% MoM to Rp14,022/USD. A slight pullback in the market however was seen approaching end-of-month in response to the 100% free-float adjusted stock weighting into several major indexes, namely LQ45 and IDX30, affecting movement of selected big cap names.
Foreign investors were recorded as net seller at end of the month totaling Rp257bn (USD21mn) on profit-taking action following the rally; while the upcoming China A-Shares up-weight into the MSCI index in August also caused an early concern.
Jakarta Basic Industry and Chemicals booked as the best performing index in Jul-19 with petrochemical related companies, namely TPIA (+26.3%) and BRPT (+20.9%) were the main driver of the rally. This was on the back of a collaboration agreement with a UAE company, where they signed a Memorandum of Understanding (MoU) to collaborate on potential petrochemical investments; coupled by recent weakness of Crude Oil Price (-2.1% MoM) which are positive for their cost. Cement sectors also saw a strong performance on expectation of better pricing environment. Top 5 drivers for the index: TPIA (+26.3%), BRPT (+20.9%), CPIN (+13.6%), INTP (+12.4%), SMGR (+11.2%).
In the meantime, continuing weak coal prices brought Jakarta Mining Index as the worst performing index for the month. This came following China coal inventory which continued seeing an uptrend, outpacing overall demand, despite of peak demand season. The prolonging US-China trade war issue also didn’t help sentiment, and rather brought other mining prices, such as base metal (i.e. Nickel and Aluminum) continued to be under pressure. Top 5 drivers for the index: BYAN (-13.3%), ADRO (-6.6%), FIRE (-47.0%), PTBA (-7.4%), INCO (-2.9%)
US equities are in the optimism towards potential interest rate cut by the Federal Reserve Bank.
DJIA 26,864.3 (+1.0%); S&P500 2,980.4 (+1.3%); NASDAQ 8,175.4 (+2.1%). Indeed, the US Fed Bank decided to cut its key benchmark rate by 25bps (to be in the range of 2.0% to 2.25%), the first time since 2008 crisis. This was said to be precautionary action from the slowing growth in China and Europe, as well as uncertainty over trade war.
The U.S.’ delegates were in Shanghai (end of Jul-19) for meetings with their Chinese counterparts to discuss on the US-China trade war. Expectations however remain low with the two sides are further apart compared to they were three months ago. As the latest meeting ended with few signs of concrete progress, hence US and China plan to meet again in early September.
Asian equities took a pullback following trade escalation between Japan and South Korea, with the former announced plan to remove South Korea from the list of most-favoured trading partners, effective on 2 Aug 2019. The trade tensions is known to be a continuation from a Korean court ruled last year that Japanese companies should pay compensation for forced-labour practices before and during World War II.
In China, the government agreed to buy more US agricultural products in response to further negotiations between the two countries in Washington in Sep-19. The prolonging discussion on trade war has put China’s manufacturing in contraction territory. This is despite of China’s official manufacturing in Jul-19 rose to 49.7 compared to 49.3 in Jun-19. Market expects the pressure in China Manufacturing will be balanced by some stimulus in real estate and infrastructure, though at modest.
NIKKEI 21,521.5 (+1.2%); Hang Seng 27,777.8 (-2.7%); Shanghai Comp 2,932.5 (-1.6%); Straits Times 3,300.8 (-0.6%); FTSE Malay KLCI 1,634.9 (-2.2%); KOSPI 2,024.6 (-5.0%)
The European Central Bank gave a signal for a possible interest rate cut in September in response to consistently below level inflation rates amid signs of decelerating economic condition in the Eurozone. EU equities move in the mixed direction on cautious as Fed-induced rally subsided a trade war concern was still on the table.
FTSE100 7,586.8 (+2.2%); CAC 40 5,518.9 (-0.4%); DAX 12,189.0 (-1.7%)
Outlook and Strategy
Recent market rally has been triggered by optimism on the beginning of an easing cycle. While the Fed finally decided to cut to lower the Federal Funds rate by 25bp to 2.0% to 2.25%, it is interesting to see the Fed’s comments post the meeting that the rate cut was a “mid-cycle adjustment to policy” and “It’s not the beginning of a long series of rate cuts” which somewhat less dovish than the market expectation. This could trigger a market pullback having its previous expectation to have at least three rate cuts in 2019.
Another pending issue is trade war negotiations between the US-China that despite of positive tone expressed by the Trump following the G20 Summit in June, we are yet to see clear solution on the table. As such will remain as a moving factor for the market and prone to volatility as the discussion re-escalates.
In domestic, with the Presidential election is now behind us, we expect market focus has now shifted towards our trade balance and ability from the government to address rising weak export concern, thus maintaining growth stability amidst weak global outlook.
The bond market was quite volatile throughout Jul-19, with 10-year benchmark yield (FR78) dropping from 7.34% to 7.08%, before rising again to 7.37% by the end of the month. In the beginning of the month, positive sentiments were mostly driven by expectation of the Fed rate cut, which led to weakening USD and thus better performing EM currencies assets. However, selling pressures occurred by the end of the month and pushed yield back, amidst low trading volume. Increased geopolitical risk, prospects of no-deal Brexit were among negative factors influencing the market. US Treasury yield moved sideways and remained at 2% area, while USD denominated Indonesian sovereign bond slightly strengthened, with 10-year INDON29 yield decreasing from 3.3% to 3.1%.
Supported by global rate outlook, BI decided to lower the 7-day reverse repo rate by 25 bps to 5.75%. Similarly, Deposit Facility (DF) rates are lowered by 25 bps to 5.00% and Lending Facility (LF) rates are lowered by 25 bps to 6.50%. This decision is consistent with the low inflation expectations, manageable balance of payment conditions, and the need to build economic growth momentum amidst the global financial market uncertainty by improving liquidity. BI expects this year’s CAD to be lower than 2018 figure of 2.98% of GDP, and within 2.5-3% range.
By the end of the month, the government had issued IDR599.3 trillion of bonds or around 72.6% of the full year target. Foreign ownership of tradable IDR government securities at the end of July stood at IDR1,015tn, an increase of 2.62% in comparison to the end of June. This represents 39.3% of the total IDR denominated government bonds outstanding compared to 39.1% in Jun-19.
Outlook and Strategy
- Consumer Price Index (CPI) in July rose by 0.31%, showing a slight slowdown compared to the 0.55% last month. This decline in inflation is attributable to the seasonality of education inflation following the new academic year and the soaring price of chili and gold. On a yearly basis, the headline inflation rose by 3.32% YoY and YTD inflation was recorded at 2.36%. Core inflation also decreased to 3.18% YoY in comparison to last month’s 3.25% YoY. BI keeps the full year expectation below mid-point target of 3.5%.
- GDP grew by 5.05% YoY in the second quarter, slightly lower than 5.07% in the first quarter. Private consumption has been the main driver with 5.17% growth, especially on basic consumption groups (food, beverage, and apparel) amid government social and subsidy spending. On the other hand, investment remained mild with gross fixed capital formation growing by 5.01%. Net exports improved due to contracting real imports. For the remaining of the year, challenges would include normalizing private consumption due to lower government social spending, as well as possible escalation of trade war tension. Combined with low inflation, it may lead to further easing by the central bank, subject to global rate trend and Rupiah volatility.
- We have maintained our duration overweight relative to benchmark due expectation of a more accommodative monetary stance going forward. Trade war escalation remains a concern, but it may also lead to downside risk on growth, which would increase the need of accommodative monetary policy.
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