Monthly Market Commentary

Monthly Market Commentary - February 2019

12/03/2019

Macroeconomics

Indonesian GDP grew 5.18% yoy in 4Q-18, accelerated from 5.17% yoy in 3Q-18, bringing the FY18 GDP to a solid 5.17% yoy, in-line with consensus estimates of 5.15% yoy. Private consumption improved to 5.05% yoy in FY1-8 (vs. 4.98% yoy in FY-17) as benign inflation and stimulus package by the government helped to boost demand. In addition, investments growth (gross fixed capital formation) also jumped to 6.67% yoy in FY1-8 (highest since 2012) compared to 6.15% yoy growth in FY-17 on the back of private investments acceleration. Last but not least, government expenditure also saw a huge acceleration to 4.80% yoy (vs. 2.14% yoy in FY-17).

4Q-18 current account deficit (CAD) widened to USD 9.1bn (vs US$8.6bn in 3Q-18), driven by weak commodity prices (i.e. coal, rubber & nickel) and China’s coal import ban caused Indonesia’s exports nominal to drop compared to its imports. However with strong surplus (USD 15.7bn) from financial account in 4Q-18, Indonesia’s balance of payment went to a surplus of USD 5.4bn (2.1% of GDP). Those figures brought FY-18 CAD to 2.98% to GDP (vs 1.6% to GDP in FY-17) and FY-18 BoP to post a deficit of USD 7.1bn (vs surplus of USD 11.6bn in FY-17).

Bank Indonesia (BI) maintained the 7DRRR flat at 6.0% in-line with street expectation. The decision came in an effort to strengthen external stability, especially controlling the current account deficit (CAD) within its target of -2.5% to GDP, while maintaining the attractiveness of domestic financial assets. Going forward, BI will apply accommodative macro prudential policy and strengthen payment system policy to expand economic financing. It targets Indonesia’s GDP growth to be within the 5.0–5.4% range driven by household consumption, strong investments and increasing non-profit institution consumption.

February 2019 monthly inflation of -0.08% came in-line with consensus of -0.04% as it brought the yearly inflation to 2.57% yoy (from 2.82% YoY previously). Food stuffs were the main deflationary contributor with 1.11% mom decline following the end of new year festive period. Meanwhile the decrease in non-subsidized fuel price seems to have little impact to overall inflation. On the other hand, processed food/drinks and tobacco were the main inflationary contributor with 0.31% increase in prices. All in all, core inflation was recorded flat at 3.06% yoy during the month

January 2019 trade deficit of USD 1.2bn came above expectation of USD 917mn (up from USD 1.1bn deficit recorded a month earlier). Exports that contracted by 4.7% yoy continue to post deeper decline compared to imports that were only contracted by 1.8% yoy in January 2019. The export weakness is attributed from the declining aggregate price of commodities (i.e. coal price) and the China coal import ban. Similarly, the import is due to weak oil price compared to January 2018.

 

Equity

After solid January performance, the Jakarta Composite Index returned to negative territory in February as the index weakened in the last 2 trading days of the month. Escalating tension between India and Pakistan led to jittery in the market, while a stream of earnings miss also dented investors’ confidence. Additionally, MSCI Asia Pacific adjustment where saw around IDR 460bn (USD 33mn) net outflow also took part in the index drop. Talks on merger and acquisition (M&A) continued to be the main theme for the month, affecting notably BNLI and BMRI stock movements. This was coupled by the first batch of FY-18 earnings release which played major parts in selected stock movements in the month.

Foreign outflow was reported IDR 3.4tn (USD 235mn) in February – including crossings, wiping out gains in several big cap stocks, namely ASII, poultry names and some banking names as well.

JCI’s average daily transaction value slowed to IDR 6.4tn (USD 449mn) compared to IDR 7.6tn (USD 535mn) in the previous month. Despite of MSCI adjustment, the slowdown was largely driven by lower risk appetite by both local and foreign investors on the back of regional volatility. Overall concern led to weakening Rupiah that went through the psychological level of IDR 14,000 against the greenback.

Trade, services and investment (+3.4%) was the best performing sector in February. Healthcare’s MIKA and HEAL saw sizeable gains as hospital names have been major laggards, while the recent co-payment scheme in BPJS is expected to help cash flow. UNTR also performed strongly despite bleak coal price outlook, but valuation is too cheap to ignore. Top 5 drivers: MIKA (+28.5%), MAPA (+31.4%), UNTR (+3.0%), HEAL (+22.5%), MPPA (+109.9%). In the meantime, the biggest loser was recorded by miscellaneous industries (-11.9%). Following weak Auto Division 4Q-18 result with declining margins and one-off expenses led to a major sell-off in heavyweight ASII. In addition, GMFI price dip following an escalated concern to airline industry after President Jokowi asked the industry to lower airline ticket price. Top 5 drivers for the index: ASII (-15.4%), GMFI (-10.3%), INDR (-7.6%), IMAS (-3.6%), GJTL (-3.1%). 

Globally, US indices continued their strong performances in February 2019 with DJIA, S&P500 and NASDAQ up +3.7%, 3.0% and 3.4%, respectively. In the January meeting, the Fed signalled it will stick to its ‘patient’ approach towards interest rate guidance on slower growth expectation in 2019 and mild inflation environment. The Central Bank expects a slower consumer spending and business investment; while tension with China and weaker global economy will take toll to the US economy. But given that labour market remains strong, they expect a steady spending by households. Overall, Fed see little risk of a surge in inflation as they expects inflation to remain or under 2% in the next year or so. Regionally, most of Asian indices continued their strength with Nikken, Hang Seng and Shanghai Comp up 2.4%, 2.5% and 13.8%, respectively. Optimism increased throughout the month as trade talks continued smoothly.

With the mix result from the US and China data, we expect market to seek further affirmation on the view of the global economic outlook from several key events in the upcoming months. Such shift in focus will be on top of trade deal following ongoing discussion between the US and China.  While we have seen strong rebound YTD in the equity market almost across regions, real catalysts are needed for a further market re-rating, in our opinion.

 

Fixed Income

The bond market strengthened in February, with the 10-year benchmark yield (FR78) declining from 7.94% to 7.78%, despite some volatility during the month. Sentiments still came from development on US-China trade negotiations, with market reacting either way depending on changing outlooks. Uncertainty also came from speculations on the Fed direction, as well as development on Brexit negotiations, both with EU and within UK itself. By the end of the month, markets were supported by the Fed’s meeting minutes which indicated that a patient approach to interest hikes would be prudent as it continued to weigh various headwinds to growth.

Bank Indonesia decided to keep the 7-day reverse repo rate at 6%. Similar to the previous month, BI still saw the decision to be consistent with effort to strengthen external stability, especially to control CAD and to maintain domestic financial asset attractiveness. Global rate outlook will therefore be an important consideration.

The latest government bond auction in February 2019 attracted the highest incoming bid of IDR 93.9tn, and bid to cover ration reached 4.3x (compared to 2.7x in previous auction). Foreign demand also remained strong. By the end of the month, foreigners’ ownership in IDR bonds increased by 2.8% to IDR 935tn. It represented 37.9% of total bonds outstanding, compared to 37.3% in January. Bond issuance would be concentrated in the first half, with less issuance needed for the remaining auctions.

Going forward, factors to watch still include Fed rate outlook, oil price trend, and outlook on Current Account Deficit which may impact domestic fiscal and monetary policies.

 

 

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