Market Update Bancassurance January 2019

Article / 31 January 2019

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Equity markets in emerging market (EM) recorded negative performances in 2018. What potentials do you see the markets will offer this year, and what positive catalysts will bolster up EM?

EM equity markets have had quite steep declines, as shown by MSCI Emerging Market index that fell 16.4% in 2018. EM market performance last year were affected by various negative sentiments including strong USD trend, aggressive interest rate hike by The Fed, and the uncertainty of trade tension between US and its trade partner. For 2019, in our view sentiment for EM is likely to improve supported by the following factors:

• The Fed’s interest rate hike is expected to be more gradual in 2019 compared to 2018. US economic growth is likely to moderate in 2019, which will limit The Fed’s room for further rate hike. We think this more gradual Fed policy will ease strong USD trend and create a more supportive environment for EM currencies.
• Expectation for a more stable EM economic growth in 2019 compared to developed markets (DM) that is projected to moderate. EM’s stable growth could potentially attract investors who seek attractive investment yields.
• EM’s market performance that lagged in 2018 compared to DM, has pushed its equity market valuation down. We think that this valuation level put EM equity market at an attractive entry point for investors, considering EM’s stable fundamental condition, healthy corporate profitability, and a more gradual Fed’s policy will create a more supportive environment for EM market.

Speaking of central bank policies, will The Fed’s interest rate policy be followed by other central banks?

In December 2018 FOMC meeting, The Fed showed a more accommodative stance by revising down its rate hike projection for 2019 down from three to two times. Going forward, The Fed’s interest rate hike will be more data-dependent, adapting to current global economic conditions. Other than the US, other DM’s central banks are also expected to remain accommodative.

• European central banks have ended their monthly asset purchase program in December 2018, but have not yet indicated any interest rate increase. Market consensus projected that interest rate increase will take place in 2020.
• Meanwhile China’s central bank policy is expected to be more accommodative to support China’s economic growth. The central bank is expected to lower its Required Reserve Ratio further to stimulate private sector and small businesses.
• Overall, we expect the pressure on EM central banks to increase interest rate will ease as The Fed’s policy turned more gradual. On top of that, lower global oil price is likely to reduce inflation pressure for EM, allowing more policy flexibility for EM central banks.

Global manufacturing PMI data decreased to 51.5 in December 2018 – the lowest since September 2016 – which in early 2019 has caused concern in the market that global economy might face a recession. What is your view on global economic growth outlook for 2019?

Global economic growth is projected to moderate in 2019, caused by a number of factors including fading US tax cut effect, and the increase in global interest rates in 2018. Also, we cannot avoid the fact that trade tension has created uncertainty for businesses and disrupts global trade activity. However, in our view the chance of global recession in 2019 is very small. IMF’s global economic growth projection is still at a healthy level of 3.7%, similar growth level to 2017. Apart from that, global recession indicators that we monitor are still positive and not at a concerning level. For instance, US labor sector and wage growth remain at positive trend.

Moving to domestic market, various global sentiments have affected the market, resulting in -2.54% JCI performance in 2018. What is your take on the equity market in 2019?

Despite the negative JCI performance in 2018, interestingly Indonesia is one of the best performing markets in the region. As comparison, in 2018 MSCI World index that represents DM fell - 10.4%, while Asia Pacific region as reflected by MSCI Asia Pacific fell -15.6%.

In our opinion, Indonesia equity resilient performance is supported by Indonesia’s fundamental condition that is relatively better compared to other EM. Indonesia’s inflation is manageable at 3.13% in 2018, GDP growth was solid at 5.17% in Q3-2018, and fiscal deficit level was kept at a healthy level of 1.76% of GDP. We believe the resilient nature of Indonesia economy will potentially attract foreign funds flow into Indonesia’s market.

In terms of companies’ profitability, the performance is fairly encouraging. 2018’s profit growth was estimated to be around 8 - 10%, and for this year it is projected to be around 10 - 12%. An interesting point for Indonesia equity is that JCI posted negative performance in 2018, while profit growth is positive, which means that valuation has de-rated. Furthermore, consistent foreign outflow since mid-2017 has caused foreign ownership in Indonesia equity market to reach its lowest level in the past few years. These facts reflect that market expectation has adjusted. Based on the above arguments, along with favorable macro-economic factors, we have an optimistic view on JCI’s prospects this year.

What is the main risk factor for Indonesia market we need to monitor for this year?

On the global side, we are monitoring the progress of trade negotiation between the US and China. Lengthened negotiation will create longer market uncertainty. However, we think that the market has priced-in that factor into consideration. Negative shock in the market caused by trade negotiation newsflow is likely more limited compared to last year. Also, we continue to monitor global economic data to further assess global economic health.

On the domestic side, we expect that in 2019 Indonesia will still record trade balance deficit, which eventually will create pressure to current account deficit. Capital goods imports – especially those related to infrastructure constructions – and consumer goods are likely to remain high in 2019. However, we are optimistic that Indonesia’s balance of payment will remain manageable, supported by foreign funds inflow into Indonesia’s capital market, as well as government’s policy to maintain Rupiah’s stability, i.e. the regulation that require repatriation of export proceeds back to Indonesia.

What’s your view on Rupiah’s exchange rate for 2019, especially after 6.16% depreciation in 2018?

We believe that Rupiah exchange rate is likely to stabilize this year, or even move stronger. As we mentioned before, Rupiah’s depreciation in 2018 was caused by negative global sentiments, while domestically the fundamental remains stable. Our positive view on Rupiah is supported by several factors:

• The reduced pressure of USD’s strengthening because The Fed has become more accommodative.
• Global oil price is at a more supportive level. As an oil-importing country, Indonesia’s trade balance can benefit from global oil price decrease.
• Proactive policies from the government and central bank in stabilizing Rupiah are well appreciated by the market.
• Potential foreign inflow into Indonesia’s market can support Rupiah exchange rate.

Considering various market dynamics you have pointed out before, what is your portfolio strategy at the moment?

With the lingering uncertainty around global economic growth, we see opportunities domestic-oriented sectors such as consumer discretionary and automotive sectors. These sectors likely to benefit from government policies that support household consumption, and stable purchasing power amid low inflation environment in Indonesia. Furthermore, big-cap and liquid stocks can potentially benefit if foreign funds flows to Indonesian market. In our view, stocks in financial sector can benefit from this factor.

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