Monthly Market Commentary - June 2019
Inflation remained under control with MoM, YoY, and YoY core inflation of +0.55%, +3.28%, and +3.25% compared to consensus estimates of +0.47%, +3.2%, and +3.12%. Inflation in June was seen to slow down, in particular the volatile food group, due to the seasonal high base effect from Ramadan and Eid al-Fitr. The government reduction of the upper limit on airfares resulted in deflation of 0.09% MoM in the administered prices group due to a decline in airfares. In a recent statement, BI mentioned that inflation in June remained low and stable and was within their target range and consistent with their policy. BI predicts that 2019 inflation will come in below the midpoint range of 3.5±1%.
Bank Indonesia held its 7-Days Reverse Repo Rate unchanged at 6.0% in the June, however more dovish signal was indicated, considering recent development in the global market, external stability, inflation level and domestic economic growth. On the other hand, BI cut Rupiah Reserve Requirement ratio by 50bp to 6.0% for commercial banks and 4.5% for Sharia banks, effective July 1st, to boost liquidity. It is estimated that the cut will add around IDR 25tn to the banking system and hence higher multiplier to the economy.
Several stimuluses were being introduced by the Indonesian government which aimed to accelerate Investment in the country, among others are (i) tax cut for super luxury income tax (PPh22) from 5% to 1% for property priced at >IDR 30bn and (2) raising threshold limit for the 20% luxury goods sales tax (PPnBM) to IDR 30bn for both landed and apartment units. The government also decided to cut the final income tax (PPh) for infrastructure bonds from 15% to 5% in order to attract more investors towards helping the government to build the country’s infrastructures.
May trade data surprised on the upside with a surplus of USD 208mn, compared to consensus USD 1.4bn deficit. Total imports saw a 17.7% YoY decline in May 2019, driven by the sizeable drop in oil & gas import (-26.9% YoY) on front-loading activities in April 2019. On the other hand, total exports dropped by 8.99% YoY.
Jakarta Composite Index (JCI) was back in the green territory, with a gain of 2.4% after a weak performance in May, driven by higher rate cut expectation and improving domestic economy post Lebaran holiday. The Indonesia’s 10-year Government Bonds rally helped equity investors’ appetite pricing in lower cost of fund environment onwards. Additionally, better than expected May 2019 trade data also gave positive surprise to market which further boosted confidence, coupled by and a peaceful end to the 2019 Presidential election result. Rupiah strengthened to Rp14.128/USD (+1.0% MoM) in response to this.
June recorded a net foreign inflow of IDR 11.0tn (USD 776mn) on the back of sizeable crossing of FASW IJ which took up IDR 9.6tn of foreign net buy. Excluding this, the market saw a net foreign buy of Rp1.4tn.
Stocks within construction, property and real estate sector came as the big winner with a gain of 6.3% in June, on the back of rate cut expectation and the incumbent officially winning the 2019 Presidential Election and thus continuing progress of infrastructure projects. Top 5 drivers were DUTI (+81.4%), BSDE (+13.7%), CTRA (+17.4%), WSKT (+11.1%) and PTPP (+12.2%). In the meantime, it was a challenging month for consumer names as they dropped 2.1%. This came following profit taking action from investors and switching from defensive to interest rate sensitive names. The biggest losers were cigarette names as they are the least beneficiary to rate cut (i.e. cash rich, and low debt) as well as worry on potential fuel and electricity tariff adjustment on expectation of continuing reform from the government. Top 5 laggards were HMSP (-7.1%), GGRM (-4.5%), INAF (-34.9%), MYOR (-3.1%) and STTP (-13.5%).
Market globally also cheered on the expectation of the rate cut. In the US, equity indices namely DJIA, S&P 500, and NASDAQ soared by 7.2%, 6.9% and 7.4%, respectively during the month, pricing in rate cut expectation from the Fed. The easing of trade tension between the US and Mexico also helped to push the equity market as President Trump suspended his plans to impose tariffs on Mexican goods after both countries agree to stem the flow of illegal immigration across the US borders. In Asia, markets bounced back strongly on the US-China trade truce expectation. During the month, the US Treasury Secretary stated that the US-China trade deal progress is at “90% of the way” which lifted overall confidence in market. Euro equities also ended in the green territory on the back of signals from the Central Bank that they might introduce additional stimulus for the regions.
We are indeed in a better position from lower global interest rate environment. This will ease Rupiah volatility and sequentially giving room for our Central Bank to take action towards loosening monetary policy. We expect liquidity to gradually improve from here onwards and hence giving pulse to economic activities. This opportunity however will come not without challenges. The trend of global economic slowdown and prolonging discussion on trade war between the US and China will not immune us from the issue. It is inevitable challenges that will be faced by our exports, notably Coal and CPO commodities which have been highly reliant to export market, notably China. We expect market focus, from now onwards, will be pointing towards of our trade balance number and ability from the government to address the concern, and thus balancing the current account deficit (CAD) issue. With the Presidential election is now behind us, market has high expectation on government of its medium and long-term economic policy especially on its ability to attract investments, both foreign and domestic. This is important we think while we started to see pro-growth policies being in place.
The bond market strengthened in June, with 10-year benchmark yield (FR78) dropping from 7.9% to 7.4%. Positive sentiments mostly came from global interest rate outlook. The Fed statement signalled a more dovish outlook with possible rate cuts due to rising uncertainties in the economic outlook. This was reflected in lower US Treasury yield, which moved from 2.12% to 2% during the month. This led to increase in Investors’ appetite for emerging market assets, which positively affect IDR bonds. The 10-year USD denominated Indonesian sovereign bond (INDON29) also saw strength with yields decreasing from 3.8% to 3.4%. This represents a decrease in the yield spread compared to the US 10-year sovereign bond of 28bps from 168bps to 140bps.
Markets also became a bit more optimistic on US-China trade relations, despite ongoing tensions and new tariffs. By the end of the month, there was a truce but without a deadline, which might change market sentiments again in the future.
Domestically, trade surplus announcement of US$208 million in May also provided positive sentiment. Imports contracted deeper than exports, although it might be due to seasonality and import front-loading in April. The trend might continue in June, which was the month of Eid with lower import activities due to shorter working days. Despite improvements in global and domestic financial markets, Bank Indonesia decided to keep the 7-day reverse repo rate at 6%. However, it cut the reserve requirement by 50 bps for both commercial and sharia banks, while maintaining the average reserve ratio at 3%, as an effort to improve liquidity and support domestic growth.
By the end of the month, the government had issued IDR 531 trillion of bonds or around 64% of the full year target. Foreign ownership of tradable IDR government securities at the end of June stood at IDR 989tn, an increase of 4.31% from the end of May. This represents 39.1% of the total IDR denominated government bonds outstanding compared to 37.9% in May.
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