Market Update Bancassurance October 2020

Indonesia stock and bond market weakened in September. What caused that?

There are several global and domestic negative sentiments overshadowed the market in September. From the global side, market practitioners were worried due to the increase of Covid-19 case especially in US and Europe. They feared this condition will force the government to apply lockdown again which will hinder economic recovery process. Also the market was affected by the uncertainty of discussion on US additional stimulus. Fed Chair Jerome Powell has emphasized on several occasions that US economy needs additional fiscal stimulus to support economic recovery. But until now debates are still going on within the Congress on the amount and details of the said stimulus. While from the domestic side, the market was overshadowed by sentiments related to the Large Scale Social Restriction that was applied again in Jakarta on September. That policy was feared to cause pressure on economic recovery process.

The US will hold Presidential Election on early November. How does the market see this as the period is approaching?

There is an opinion arising that if Joe Biden – who is the candidate of Democrat Party – was elected as the President then the market will probably respond to it negatively. The worry was based on some of Biden’s policy that were said to be not pro-business, such as the discourse to increase corporate tax, to increase minimum wage, and to tighten the regulations for technology companies. But as the condition of US economy is weakened by Covid-19, it will be difficult for US government to apply policies that are not pro-economy. Such condition happened in the past when some of President Obama’s programs were postponed to face the 2008 crisis. At the time President Obama passed a very large amount of stimulus and continued the tax deduction program from his predecessor, President Bush. Therefore, we think whoever elected in the coming US Presidential Election, his policy focus will still be supportive to economy and business which are currently very urgent to support.

On September, Large Scale Social Restriction was applied again in Jakarta. What impact does it have on the economy?

Jakarta contributes around 17% of Indonesia GDP, which is the province with the largest contribution to Indonesia economy; therefore the application of Large Scale Social Restriction might affect Indonesia economic recovery in Q3-2020. The positive side is the impact of Large Scale Social Restriction in September was presumably not as big as it was in April – June period, since the current one was not as tight as the previous one, and also with a far shorter duration since the Large Scale Social Restriction in Jakarta had already been relieved on October 12th. But, considering the big role Jakarta has on economy, it is predicted that economic recovery will not go as fast as it was predicted before. The government revised down economic growth projection for Q3-2020 to around minus 2.9% to minus 1.1%. That numbers show deeper correction of GDP growth compared to earlier projection which was minus 2.1% to 0%.

Indonesia is predicted to officially go into recession with Q3-2020 economy is projected to be negative again. What is the economic outlook for Q4-2020?

Although economic growth in Q3 is predicted to stay negative, we see improvement compared to Q2 whose growth was minus 5.32%. In Q4 we think this recovery trend will still potentially happen, supported by acceleration in Covid-19 handling budget absorption. By the end of September the government has disbursed 43% of total stimulus budget, increased rapidly from 31% by the end of August. In our opinion stimulus distribution will be even more accelerated in Q4, especially corporation funding budget which hopefully can be disbursed starting in October.

But keep in mind that pandemic condition is very hard to predict. Covid-19 spread mitigation has to still be a priority, because if Covid-19 case keeps increasing, there’s a risk that a tight Large Scale Social Restriction will be applied again, which will negatively affect economic recovery process.

The Omnibus bill on Job Creation has been has been passed into law. How does the market respond to the Job Creation law?

So far the market responds positively, indicated by the strengthening of Rupiah exchange rate. In our opinion Job Creation Law has the potential to create positive sentiment in the business world. The main objective of this law is to improve business condition in Indonesia in order to attract investment into Indonesia, especially amidst the trend of relocation of factories from China to other Asian countries. Of course Job Creation Law has to be followed by supporting regulations and effective executions. Not only for real sector, Job Creation Law can also create long term positive sentiment in Indonesia financial market. Stock market can be benefited by a better Indonesia economic growth prospect, a more stable Rupiah exchange rate supported by foreign inflow potential in real sector that will increase foreign exchange, and bond market will also be benefited by a better monetary stability condition.

Stock and bond market move relatively sideways these last couple of weeks. How is the market outlook ahead?

In short term there are several factor that burden market sentiment such as US Presidential Election and fiscal stimulus negotiation, and the increase in global Covid-19 cases. In domestic market as well there are uncertainty factor related to BI burden sharing policy and the discourse on Monetary Council establishment. Those short term sentiments aside, we think stock and bond market still have potentials ahead supported by global reflation policy. Reflation is a policy to stimulate economy through accommodative fiscal and monetary policies with the goals to improve economy, encourage buying and prevent deflation. This is a pro-economic policy that will potentially press down interest rate and improve investment appetite on risky assets, including stock and bond market of developing countries. Other than that, Covid-19 handling is still the key to economic recovery. Positively, the development of Covid-19 vaccine is continuing, and currently there are 10 vaccines in the third phase of clinical test which is the final phase before approval and production.

Any suggestions to investors amidst this pandemic?

Amidst the pandemic certainly there are many uncertainties that may increase financial market volatility. Reassess your portfolio allocation, and make sure the allocation is still in accordance to your investment goal and risk profile. High volatility in the market might make your portfolio allocation does not fit allocation asset that you initially set; this condition might change your portfolio profile. Rebalance, so that your portfolio allocation still fits the allocation you have set. For long term investors with aggressive profile, the current condition can be a chance to average down your investment, or start investing while market value is still attractive.

 


 

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.
This month we present the latest market comments from Chief Economist & Investment Strategist, Katarina Setiawan. 

Katarina Setiawan
Chief Economist & Investment Strategist

 

Katarina joined PT Manulife Aset Manajemen Indonesia (MAMI) on July 1st 2013. Katarina has acquired Deputy Investment Manager from Bapepam-LK (Capital Market and Financial Institution Supervisory Agency) on April 30th 1999 number KEP-28/PM/IP/WMI/1999. She has more than 20 years of experience in the financial industry and stock market. Before joining MAMI, Katarina worked at  Kim Eng Securities as Research Director. Previous to that Katarina worked as Director at IBAS Consulting, Director at Omni Nusantara, and Supervisor Consultant at Arthur Anderson & Co. Katarina holds Master of Business Administration degree from Indiana University, Bloomington, USA.

 

 

 

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