Monthly Market Commentary

Monthly Market Commentary - January 2019

12/02/2019

Macroeconomics

On the macro front, 2018 Fiscal deficit came slightly better than market expectation with 1.8% to GDP following acceleration in revenue by 17% yoy, reaching 103% of target. Non-tax revenue came as main driver (+148% of target) driven by higher oil and coal prices. On the other hand, total expenditure grew 10% yoy, reaching 99.2% of target, with strong energy subsidy spending grew 57% yoy (162% of target), while capital spending declined 11% yoy (91% of target). Such number implies to a 2019 revenue and expenditure target growth of 11.5% yoy and +11.8% yoy, respectively. We see risk on the revenue side given normalizing global oil and coal price, as such will make tax reform and intensification as key to fiscal revenue growth for the year.

During the month, Government published December 2018 trade data of which came at a deficit of USD 1.1bn, an improving figure compared to the USD 2.0bn of deficit in November 2018. Despite the decelerating import figure to 1.2% yoy (from 11.7% yoy in November 2018), steeper contraction in export by 4.6% yoy (from -3.2% yoy in November 2018) drove the continuing deficit number. The deceleration in imports was mainly due to oil and gas imports that contracted by 23% yoy; while exports weakness continued to be caused by weak aggregate price and China’s coal import ban. Nevertheless, the healthy December 2018 foreign exchange reserve of USD 120.7bn is supported by strong momentum of foreign inflows.

As expected, Bank Indonesia (BI) maintained the policy rate flat at 6.0% despite of widening current account deficit (CAD) in December 2018. The Central Bank argued that the current rate position is still consistent with efforts to reduce CAD, while at the same time maintaining the attractiveness of domestic financial assets as well. BI also continues to maintain liquidity both in Rupiah and FX market as well, in order to support the stability in monetary and financial system. As reported in news, BI Governor also signalled that benchmark rate almost reached its peak, while at the same time reaffirming BI’s stance to remain pre-emptive and ahead of the curve.

Monthly inflation in January 2019 was 0.32% mom, came below consensus of 0.50% mom, bringing the yearly inflation to 2.82% yoy. The figure records the lowest in the past 3 years for January as the increase in commodity prices remain manageable, while transportation price saw a deflation of 0.16% mom on the back of price normalization after holiday season in December 2018. The biggest inflation driver came from foodstuff that posted 0.92% mom inflation during the month. Meanwhile core inflation was recorded at 3.06% yoy, slightly decreased from 3.07% yoy in December 2018.

Fourth quarter Indonesia GDP was 5.18%, relatively stable compared to 5.17% recorded in the previous quarter. Private consumption grew stronger at 5.08%, driven by transportation, communication, and equipment expenditure. Meanwhile, investment eased to 6.01%, affected by the deceleration of cement consumption and capital goods import. Government expenditure also slowed to 4.6% from 6.3%, as realization of spending concentrated in the second and third quarter. The 2019 growth will likely be supported by social spending, especially in the first half of the year.

Equity

The JCI recorded solid monthly performance in Jan19, +3.00%, the strongest monthly gain since 2017. This came on the back of strengthening Rupiah which helped overall risk appetite among investors. While sectors across the board booked positive return in January, the main investing theme was mergers and acquisitions (M&A) and laggards which rallied outperforming market performance.

JCI booked a net inflow of IDR 13.8tn (USD 962mn), including two big crossings (SMCB and BTPN) following completion M&A transaction in the company. Excluding those, however, foreign posted a net inflow of around IDR 12.4tn (USD 884mn) following buying flows coming into banking and other big cap names, namely HMSP, UNVR, TLKM, ASII. Such mood improved average daily transaction value significantly to IDR 7.6tn from IDR 6.3tn in December.

Infrastructure, utility and transportation sectors came as the best performers, led by FREN (+88.5%) following speculation on M&A with ISAT (+66.5%). The solid share performance was also followed by other names within the sectors which notably laggards relative to other sectors, including TLKM (+4.0%), PGAS (+21.2%), TOWR (+22.5%) and TBIG (+36.7%).

January was also in favour to mining related names following bottoming out underlying commodity prices. The price of Newcastle 5,500 kcal coal increased by 3.8% mom as the devastating accident in China caused production halt in Shenmu and Fugu areas for 2 months. In addition, LME Nickel 3-Months contract also shot up by 16.8% mom as inventory continue to come down, while accident in one of Vale’s Brazilian iron ore operations also caused traders to speculate on production outputs going forward. Top 5 drivers for this sector are INCO (+18.1%), ADRO (+14.4%), MEDC (+47.4%), ANTM (+26.1%) and BUMI (+63.1%).

Indeed, recent developments in global market, namely 1) declining oil price; 2) optimism on US-China trade talks; and 3) More dovish tone from the Fed, have reduced risk premium towards Indonesian market, triggering offshore portfolio inflows. Such sentiments have been translated into strengthening Rupiah against USD, pricing in a recovery in the economy, notably consumption, which has been the backbone of growth story in Indonesia market.

We remain cautiously optimistic. While we believe positive Rupiah movements and low oil price environment will be translated into manageable inflation, which is key amidst global uncertainties, but low crude palm oil (CPO) and coal prices environment may still pose risk to growth in our export number, as well as consumption especially within rural areas of which still contributes around 40% of our population, hence our GDP growth outlook.

On the trade war between the US and China, despite of positive on-going negotiations, both countries will still clash economically going forward, denting picture of global economic outlook.

 

Fixed Income

The bond market remained dynamic in January 2019, with 10-year benchmark yield (FR78) increasing from 7.93% to 8.15%, before returning to 7.94% by the end of the month. Positive sentiments came from the more favourable outlook in US-China trade negotiations, as well as expectations on a more dovish Fed. Foreign inflows were seen by the end of the month, and contributed to emerging market currencies’ performance. On the other hand, US government shutdown and ongoing Brexit negotiations contributed to uncertainty affecting market sentiments in general.

BI decided to keep the 7-day reverse repo rate at 6%. BI saw the current rate still consistent with efforts to lower Current Account Deficit and maintain domestic market attractiveness. There are signals that policymakers are now close to the end of tightening cycle, which is supported by indications of a more dovish Fed. Global interest trend remains a factor that will determine BI decisions going forward.

By the end of the month, foreign ownership in IDR bonds increased by 1.9% to IDR 910tn. It represented 37.3% of total bonds outstanding, compared to 37.7% in December 2018. Bond issuance is expected to be concentrated in the first half of the year, with target net financing amounting to IDR 359.3tn.

Going forward, factors to watch 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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