This year, the Asian stock market moves in deep “contrast” when compared to it of the United States. As of November 7, MSCI Asia Pacific Ex Japan’s current year performance was booked at -11.9%, while the S&P 500 - which is one of US’ stock indexes - booked +5.3%. Taking into consideration the latest news, what is the prospects of Asia’s stock market next year?
We have a more positive outlook on Asia’s stock market next year. This is backed by the expectation of US economy growth, which is anticipated to soften in 2019. This is triggered by:
• Fading tax cut effect. The effect has only been a one-off in 2018, and is predicted to discontinue into 2019.
• Trade war with China will finally rub off to US’ domestic economy.
• Negative impact of USD’s being too strong.
• Continuing increase of interest rate will naturally act as a handbrake to the economy. An increase in interest rate commonly begins to show effects after 1,5 years.
The signals of moderation in US’ growth will have positivife impact to Asia’s financial and currency markets, since it implies The Fed’s caution and conservativeness in deciding monetary policies so as not to ‘brake’ the economy excesively. This condition can ease pressure on the central banks and currencies in Asia. In addition to that, moderation in US economy growth might also be impacting US corporates earnings. This leads to the Asian earning growth forecast being superior to US’s next year. The sturdiness of US’ stock market this year has also been backed by stock buyback, which we believe is insustainable to increase shareholder values. Besides being supported by positive forecast of Asian earning growth, Asian markets also offered attractive valuations, which is ‘cheaper’ than the US’, and was on it’s five-year bottom.
It is mention previously that The Fed is predicted to refrain from being aggressive in increasing its interest rate next year. Howmany increases do you predict will take place in 2019?
Based on FOMC meeting in September, The Fed predicted three increases, while market consensus predicted two increases in 2019. Fed rate increases are predicted to be less aggressive than this year’s, since current interest rate is getting closer to the ‘neutral rate’ of 3%, which is believed to be the point that do not stimulate nor suppress the economy.
On domestic market, approaching the end of year, the performance of Indonesian equity market has not reached its maximum potentials, where earnings were showing positive growth while the market recorded negative performance. How do you see this?
High valuation of Indonesian stock market in the beginning of the current year - reaching +2 in standard deviation - has caused the stock market to be vulnerable to both domestic and global ‘uncertainties’. Indonesia market corrections this year is not triggered by domestic fundamental factors, but also by global sentiments. ‘Adjustments’ in investor’s expectations of Indonesian stock market has brought its valuation to a more attractive level, where it has hit -1 in standard deviation, much lower than it in the beginning of the year. Low foreign ownership and stock market growth that is not in accordance with projective corporate earnings this year pave ways to the chance that Indonesian stock market becoming more attractive next year.
It is frequently said that the results of Q3’s corporate earning results can act as predictions of stock market’s future movements in the future. By far, how do you see Indonesian Q3 corporate earning results?
Q3’s corporate earnings results are relatively healthy. Fifty seven companies - with total market capitalization of around 70% of JCI - reported net profits of +17% in Q3, while 9M18 grew +10% YoY. This is higher than net profit growth of 1H18, which was +6% YoY. Generally a net profit rebound took place across all sectors including commodity, non-commodity and banking. EPS growth forecast of 10% this year can happen as long as the momentum of net profit growth can be maintained into Q4.
The plan to adjust subsidized fuel price has again emerged to surface, provoking pros and cons. What is the impact of such adjustment to the economy?
Previously in October the government has increased non-subsidized fuel (Pertamax series) by varied levels, from IDR900 to IDR1,350 per litre. It was once said that the government planned to adjust the price of subsidized fuel, which was then put on hold. It was predicted that the government will only execute this adjustment after the presidential election to take place in April 2019. The impact to economy can be seen from two perspectives:
• Negative side. If the prices of both subsidized and non-subsidized increase, inflation will be pushed higher. The impact in inflation will depend on the percentage of such increase. Bank Indonesia has released a calculation, which implied that if all type of fuel prices increases by IDR1,000, inflation will follow by 0.9% to 1.0%. The increase in inflation rate will lead to decreasing consumption, and eventually moderation in economy growth.
• Positive side. The increase in fuel price, particularly subsidized fuel can potentially reduce current account deficit and the deficit in the State Budget through the allocation of smaller energy subsidies. By far, high oil imports has been the main cause of CAD, specifically amid the increase in world oil prices.
What sectors do you think are to watch out for next year?
That will be the ones that have been - due to competition - under pressure in terms of profit margin, but due to consolidation or whose players have become more rational - show improvement in profit margins. Among others are:
• Cement. Over the past few years, this sector has undergone price war caused by new players who were selling at prices much lower that he major players. This year, major players has gained their capacity to raise prices since smaller players are under pressures from higher coal cost, impairing them from the price war. Some of them even have stopped operating
• Telecommunication. Irrational tariff war during the last few years has caused the profitability of Indonesia’s telecommunication sector to be very low when compared to it of other markets. Similar to cement sector, telecommunication is starting to show capability to increase prices and reduce pressures to profit margins. Going forward, we will keep monitoring what these players are doing, however at this point the situation is far more conducive.
What is the investment strategies to take up to drive alpha?
Our strategy remains focused on the sectors and stocks which benefit from the improvements in the global economy, and are protected from the effects of weakening in Rupiah, such as commodity. We also have our eyes on blue chip stocks with attractive valuation after quite deep decline during the last few months. E.g. automotive, which has been valued relatively ‘cheap’, telecommunication which is predicted to have increased in tariffs, and cement which has been showing consolidation.
Narasumber: Caroline Rusli
Seeking Seeking α is a monthly communication released by PT Manulife Aset Manajemen Indonesia (MAMI). Presented in the Question and Answer format, Seeking α is aimed at presenting the views of MAMI's forward-looking investment experts, directly before you, MAMI's professional investors.
This month, we feature updated market commentaries from our Senior Portfolio Manager - Equity, Caroline Rusli, CFA.
Caroline Rusli, CFA
Senior Portfolio Manager - Equity
Licensed Wakil Manajer Investasi (Fund Manager’s Representative) from Indonesia’s Financial Services Authority (replacing the role of the previous institution, Bapepam-LK) issued on February 22, 2005, through the Chairman's Decree Bapepam & LK No. KEP-26/PM/WMI/2005. Caroline began her career several fund houses before starting her career with Manulife. Caroline obtained a Bachelor Degree in Economics from the University of Tokyo, Japan.
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