Global financial market was corrected amidst the fear of COVID-19 spread. Exactly what is the impact of the virus spread to global and domestic economy?
The virus spread has the potential to negatively affect global economic growth in short term. With factories closed down, quarantine, and other virus spread prevention efforts, economic activity becomes limited. One main affected sector is tourism sector and its derivatives that got hit by the decrease of tourists number. But the biggest concern to global economy is the disruption towards supply chain caused by the close down of factories in China which have important role in global supply chain system. But of course we expect that as the virus spread subsides, economic activity will go back to normal.
Domestic economy is also expected to be negatively impacted in short term by the virus spread although the impact will be minimal. Indonesia economy is very domestic oriented, so the impact to Indonesia will be relatively limited compared to other countries that more rely on export and tourism. For Indonesia, net contribution of export is only around 1% of total GDP, and tourism contributes less than 2% of total GDP, far less than other South East Asian countries such as Singapore, Malaysia, and Thailand. Other than tourism sector, so far economic activity in Indonesia is still normal, no factories close down or large scale quarantine yet that limit economic activity. Indonesia manufacture sector does need intermediate goods supply from China, but in total only 27% of Indonesia intermediate goods import is from China, and companies still have supplies to run production activities.
Will the virus affect long term economic outlook?
In our opinion the impact of the virus spread is still short term and not yet affect long term economic outlook. Besides tourism sector, disruptions in other economic sectors will potentially improve as the virus spread subsides. Purchasing or investment plans that were delayed due to virus spread can be realized once the virus spread subsides, which means there’s a potential for economic rebound after the virus spread ends. This is what happened after SARS epidemic in 2003 where economic activity rebounded after SARS spread subsided in April 2003. Therefore we think the negative impact of COVID-19 to economy is of short-term disruption, not destruction.
So far we are optimistic that the virus spread can be contained, supported by the fast and coordinated response from global governments, as well as education to public to prevent further spread. Epidemics always come in three steps, escalation (number of case escalates rapidly), stabilization (number of case is stable and starts to decrease), and de-escalation (number of case decreases sharply). The positive thing is currently the number of case in China is decreasing, which indicates that with effective and organized quarantine process, the virus spread can be contained.
Specifically about domestic stock market, JCI is down from 6300 in the beginning of the year to 5300-5400 due to the concern of COVID-19. Is there any further downside risk?
Corrections that happened makes JCI goes down to very cheap valuation level. JCI PE ratio is down to 12.8x, which is -2 of standard deviation of 7 year average. Statistically, with -2 standard deviation, it means it’s only 2.3% of data probability to reach this level, which indicates a very cheap level for JCI and historically rare. The last time JCI reached this level was in 2015. But what needs to be stressed out is that Indonesia fundamental condition in 2015 and today is different. In 2015 inflation reached 7% which indicates very high price increase, while today inflation is maintained at 2.7%. From exchange rate side, in 2015 rupiah drastically weakened from 12,800 to almost 15,000 per USD, while today rupiah is stable in around IDR14,000. So the significant correction of JCI today is mostly due to fear factor, not fundamental. Therefore in our opinion the current JCI correction is temporary and can be an opportunity for long term investors.
Response from the government and central bank can potentially be a support for the market. BI has cut its benchmark rate and required reserve ratio (RRR) to support the liquidity of financial system. Meanwhile the government has issued a IDR10 trillion fiscal stimulus package to support the affected sectors such as tourism, airlines, and housing. In our opinion this policies are only first steps, and there potentially be further stimulus policies from the government and central bank which will support market confidence.
Due to COVID-19, what is your JCI target for this year? Is there revisions to the target you aimed at the beginning of the year?
At the beginning of this year we targeted that JCI will reach 7050 – 7100 based on the expectation of 10% earnings growth of issuers. That target was set with the assumption of a more conducive global condition, with subsided trade tension and the gradual improvement of global economy. But of course this virus spread is a black swan event which has the potential to hinder global economic growth, although the magnitude depends on how wide and long the virus spread happens. On the other side, it needs to be taken into account how the policy response from global countries are, either in the form of monetary or fiscal stimulus. These are important, because those stimulus are not only expected to become the buffer against the negative impact of the virus to global economy, but also equally important to regain investors’ sentiment towards riskier asset which currently experience panic. Therefore we will continue to monitor the development of these 2 factors and the effect to earnings outlook before revising our JCI target.
What can be the catalysts for Indonesia stock market ahead?
Subsiding virus outbreak would be a catalyst for the market, but apart from that omnibus law has the potential to become a catalyst for the market. Structurally, Indonesia economy needs a new source of economic growth and can no longer rely on the volatile commodity sector. Attracting foreign investments is a solution for Indonesia that can be a new source of economic growth by creating new employment and absorbing a lot of work force. Omnibus law is considered to be a much needed policy to reform Indonesia labor and tax sectors, so that we can compete with other Asian countries to attract investments into Indonesia.
In our opinion currently the market is still focusing on COVID-19 and not yet all price-in to the potential of this omnibus law. Moreover, due to current global events such as trade wars and virus spread, it is argued that multinational companies need to diversify their production basis so that they won’t be affected by geopolitical condition of a country. This will encourage companies to diversify their production basis outside of China and can be an opportunity for Indonesia to make use of this chance by completing the omnibus law.
What is your suggestion to investors amidst the current market condition?
Learning from history, this isn’t the first time we see a sharp correction in the market. And also from history we learn that sharp corrections were generally followed by fast recovery, as long as macro economic fundamentals are solid. As mentioned before, current JCI correction is more due to non-fundamental factors, because so far we haven’t seen any indication of companies earnings will fall more than 10% in 2020 due to virus spread. In short term, volatility in the market is likely to continue because the virus spread hasn’t subsided. But we are still certain that eventually stock market will return to its fundamental value. Therefore current market correction can be an opportunity for investors to gradually enter the market.
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.
After starting his career as an Equity Analyst in a securities company in 2011, Andrian joined PT Manulife Aset Manajemen Indonesia, where he started off as an Equity Analyst until currently takes charge as Portfolio Manager. Andrian has acquired Deputy Investment Manager license from the Financial Services Authority (OJK) since 2012. When he was a college student at Surabaya University, he was chosen to represent Indonesia at the 4th Annual CFA – Global Investment Research Challenge in Manila, Philippines. Andrian acquired Bachelor of Economics degree, majoring in Financial Management from Surabaya University.
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