In the midst of a more optimistic market as we enter 2020, suddenly global economy is faced with the fear of Coronavirus epidemic. Can this event change the global economic stabilization in 2020?
So far we see that Coronavirus epidemic is not something permanent in a long term, although in short term this event gives quite an important shock effect to global economy. Considering the comprehensive steps taken by the Chinese government to prevent and minimize the spread of Coronavirus, we expect that the economic data distortion caused by this event will go on until at most one or two quarters ahead. Based on this, our view on global economic stabilization theme in 2020 does not change.
Besides, the Chinese government and central bank seem to be very responsive to maintain economic stability through fiscal stimulus and interest rate cut to ensure the availability of liquidity in the market. Hopefully those policies will diminish the negative impact of Coronavirus to the economy of China.
We predict that global growth to improve heading to the second midterm this year supported by improved global trade sentiment, low global central bank interest rate, gradual inventory restocking, and the acceleration of 5G technology adaptation that are expected to mitigate the negative impact from coronavirus.
The fear of Coronavirus spread has put some pressure on Asia stock market compared to that of developed countries. What is your take on this?
Economy-wise – compared to developed countries – Asia is thought to be more susceptible to the negative impact of Coronavirus spread. However, the level of susceptibility among Asian countries are not the same, depending on how much economically exposed is a country to China, either in tourism, industrial supply chain, FDI, and export import activity. That is why the level of stock market and exchange rate corrections in each Asia countries are also different. Interestingly, correction that happens since the start of Coronavirus spread makes Asia stock market valuation more attractive. In the beginning of the year, PE ratio F12M of Asia Pacific stock market rose to more than +2 of deviation standard, now it has decreased to under +1 standard deviation in the last five years. Judging from previous experience, financial market tends to reach its lowest point when the virus spread intensity subsides.
So far we see the main theme of Asia earnings improvement in 2020 is still maintained, supported by expectation of growth recovery as we have explained before (global trade improvement supported by low base effect, gradual inventory restocking, and acceleration of 5G technology adaptation). Historically, earnings of Asian companies are positively correlated with global trade.
Switch to domestic market, does Coronavirus epidemic have big impact on Indonesia economy?
The implementation of lockdown policy in some regions in China has big impact on global tourism. Moreover this happened during the Chinese New Year as millions of Chinese people usually went overseas for vacation. Countries with high dependency on tourism towards their GDP – especially to Chinese tourists visit – will suffer bigger negative impact. The contribution of Indonesia tourism to GDP is relatively lower than other Asia region countries, makes Indonesia is considered to be one of the countries with relatively limited exposure to Coronavirus epidemic. The contribution of tourism to Indonesia GDP is ±1.8% lower than, for instance, Thailand that reach ±12% of GDP. Indonesia exposure to the epidemic will potentially increase if China extends the Lunar New Year holiday and lockdown policy which can lower economic activity which will result in the decrease of commodity demand and export import activity.
Judging from previous epidemic experience, Indonesia wasn’t too affected by SARS in 2003 and avian flu in 2006-2007, either in the amount of case, death toll, or financial market and exchange rate performance. If the epidemic goes on longer than expected, risk-off sentiment will increase and may trigger capital outflow from Indonesia market. The faster and more effective the virus spread control is, the more positive the impact to global and Indonesia economy.
It was mentioned earlier that Asia stock market valuation becomes attractive again. How about the current Indonesia stock market valuation?
Correction that happened recently also makes JCI valuation more attractive in which PE ratio F12M has decreased to under -1 standard deviation in the last five years. This condition creates investment opportunity for investors with long term investment horizon to gradually invest again in Indonesia stock market.
What positive catalyst you are anticipating in Indonesia stock market this year?
Confirmation of earnings improvement and the execution of policy reform plans such as; omnibus law, Labor Law revision, tax cut, and Negative Investment List revision is the positive catalyst to be highly anticipated this year. Global sentiment improvement is expected to encourage the inflow of foreign funds to Asia stock market, in which historically Asia stock market inflow has a high correlation to Indonesia stock market performance. Generally, Indonesia stock market is influenced by Asia stock market outlook and domestic companies earnings growth.
What investment strategy you implement to generate alpha in portfolio?
Our investment process focuses on identifying investment opportunity through macroeconomic projection and fundamental analysis on every companies. For short term we choose more defensive sector – with less exposure to global economy and those that have sharply corrected – for instance consumer goods and cement. We will continue to monitor liquidity and volatility to ensure our investment management gives optimum results with controlled risk.
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.
Caroline Rusli, CFA
Acquired Deputy Investment Manager license from Capital Market Supervisory Agency and Financial Institution (Bapepam) on February 22nd 2005 according to the decision letter of Chief of Capital Market Supervisory Agency and Financial Institution No.KEP20/PM/WMI/2005. Caroline started her career at PT Panin Asset Management, then she worked for PT First State Investments Indonesia. Caroline holds the degree of Bachelor of Economics from University of Tokyo, Japan.
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