The positive trend of global stock market continued in August. Amidst Covid-19 pandemic that has not yet subsided, what drives the strengthening of the stock market?
Currently market optimism towards economic recovery is more dominant than the worries related to Covid-19. It seems the market has accepted the fact that Covid-19 is hard to eliminate until a vaccine is discovered. Therefore the focus of the market now is more to see what the economic condition trend ahead although Covid condition is not yet improving. Positively, the latest data from various large countries shows economic data improvement trend. Be it from US, Europe and Asia we see economic data improvement, from manufacture sector as well as service sector such as retail sales. Beside economic data, the market also responds positively to the vaccine development, whereas currently there are 7 vaccines that have entered the third phase of clinical trials on human, which the last phase before approval and mass production. This update also supports market optimism globally.
JCI has strengthened ~30% from its lowest point on March. Is the current level can already be considered expensive? Are there factors that will still support the further market strengthening potential ahead?
We think fundamentally there is still upside potential in stock market. Currently the market starts to see economic recovery potential in 2021 that will also support issuers’ performance. Consensus predicts issuers profit can grow around 30% in 2021. We also see market strengthening potential from foreign investors inflow into Indonesia stock market. So far market strengthening is dominated more by domestic investors activity, while foreign investors are still recording outflow. Parallel to economic recovery trend and the improvement in market risk appetite, we see the potential of foreign investors returning to Indonesia stock market.
This opinion is also supported by the abundance of liquidity in global market. Central banks injected liquidity massively to support economy. For example, The Fed balance sheet drastically increased USD 3 trillion in 8 months, while previously it took 8 years for The Fed to inject that amount of liquidity post 2008 financial crisis. This condition can trigger yield hunt including on the more risky assets in search of more attractive yields. Therefore we think there’s potential for the return of foreign fund into Indonesia market that will support market strengthening.
There are opinions that say ‘new economy’ (technology and internet based) stocks are primadonas at the time, while ‘old economy’ sectors have not yet gained attention. Will this limit foreign inflow potential into Indonesia stock market?
‘New economy’ stocks are primadonas for investors because IT and internet based sector is regarded as minimally affected – or is even profited – by Covid-19 condition. Indonesia stock market is still classified as ‘old economy’ because business sector in JCI is still dominated by banking and consumer goods sectors, while there are only minimal numbers of IT or internet related stocks. Even so, we think this ‘old economy’ sector still has potential. Market will turn their attention on old economy sector again as economic data recovers and investors risk appetite improves. Fundamentally, issuers’ performance in this sector will also improve, parallel with economic recovery and the return of consumers and business confidence.
As Covid-19 daily cases in Indonesia have not yet improved, are you optimistic about economic recovery potential in semester II-2020?
We see signal that Indonesia economy is recovering. Indonesia manufacturing PMI went up to 50.8 in August, which indicated expansion, the first time it enters expansion zone since the pandemic began. This data indicates that demand is improving. Retail sales data also shows improvement from its lowest point, although it’s still within contraction zone. In our opinion this economic data improvement can still continue supported by the acceleration of government stimulus absorption to improve the people’s purchasing power. The payment of the 13th salary for civil servants in August, private employees subsidy program, and electricity bill discount plan, are some examples of policies to support the people’s purchasing power in semester II-2020. Household consumption contributes around 55% of GDP, therefore policies that support purchasing power is crucial in economic recovery process.
Government budget deficit in 2021 Draft State Budget (RAPBN 2021) is targeted to be 5.5% of GDP, more than the expected 4.2%. Will this be a concern for stock market?
For stock market this budget posture is supposed to be a positive sentiment, because this indicates a pro development government policy direction. Stock market usually follows the direction of economic and issuers profit development. Pro development government policies have the potential to support stock market. We also appreciate infrastructure budget that increases high again – around 47% - because this shows the government commitment to keep the balance between economic recovery acceleration and to continue structural reformation.
The House of Representatives is said to plan to establish Monetary Council to help the government and Bank Indonesia in coordinating monetary policies. This policy raises concern that it will disturb BI independency. What do you think of this?
BI independency and credibility is one of the factors the investors appreciate about Indonesia, therefore this discourse concerning Monetary Council can be an uncertainty factor for the market. We still have to monitor the progress of the discussion of this policy. At this time this policy is still being discussed by the House of Representatives and there’s not yet detailed information on how the Monetary Council will function and its authority. In our opinion there will still be more studies by the House of Representatives that might change the form or the details of this policy. Of course the policy makers will consider the inputs from market practitioners on this matter, considering that investors perception is a crucial factor in maintaining macroeconomic stability.
What is your current portfolio strategy? What sector do you prioritize?
In our opinion the current market sentiment has become more positive supported by gradual economic recovery and macroeconomic stability. Based on this we gradually allocate portfolio on cyclical sector stocks such as banking and materials which can be benefited by economic recovery trend and market risk appetite. We do our stock selection based on deep fundamental research, which take into account the current sentiment, valuation, growth potential, as well as stock liquidity to optimize portfolio risk-return
Seeking α is a monthly communication released by PT Manulife Aset Manajemen Indonesia (MAMI). Delivered in a Question and Answer format, Seeking α is intended to present the views of MAMI investment experts who are forward-looking, directly in front of you, MAMI professional investors.
Samuel Kesuma. CFA
Samuel began his professional career in financial industry with PT Trimegah Securities as Investment Analyst. Before joining PT Manulife Aset Manajemen Indonesia (MAMI), Samuel worked at PT BNP Paribas Investment Partners as Equity Portfolio Manager, PT Trimegah Asset Management as Equity Fund Manager, Abacus Capital (S) Pte Ltd – Singapore as Corporate Finance Analyst, and ANZ Bank – Singapore as Investment Consultant. Samuel holds Chartered Financial Analyst (CFA) certificate..
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