Market Update Bancassurance November 2020

Joe Biden has been declared by many medias as elected president, defeating Donald Trump. What is the impact of this one of the most important events in 2020 to financial market ahead?

So far market is reacting positively towards Joe Biden’s projected win. The possible scenario of divided Congress – a part is dominated by Democrats, a part by Republicans – is predicted to have positive impact on bond market, because the policies made by the Congress will be more ‘balanced’, especially on tax. The threat of interest rate hike also subsides amidst the prospect of fiscal stimulus which is predicted to be more moderate compared with ‘Blue Wave’ scenario. For global trade and foreign policies – although we predict that tensions between US and China will continue – Joe Biden administration will adopt more polite, diplomatic, and less confrontative compared to Donald Trump administration. The reduction of uncertainty factor related to US Presidential Election and more constructive hope for global trade are predicted to support more positive sentiment towards developing countries assets, as premium risk equity decreases. Ahead, it is important to pay attention to macro development since it will form and affect US government policies in the future.

For domestic market, the approval of Omnibus Law amidst global uncertainty caused by Coid-19 pandemic and heightened rivalries between countries is seen as a breakthrough that will support Indonesia economic growth. What is your opinion on this?

Omnibus Law is a deregulation of some laws – including labor, business convenience, government administration downsizing, tax, and land provision – which hopefully will improve Indonesia investment competitiveness. Due to the pandemic, unemployment in Indonesia in August reached highest level since 2011, which is 7.1% or equivalent to 9.8 million people. Trade war between US and China also triggered a number of foreign companies leaving China to find a new country as their production basis. That is why the government accelerates the approval of Omnibus Law to make investment easier so that we can seize the opportunity from company relocations in an effort to encourage domestic job creation. We think that regulation reform through Omnibus Law can be a new source of mid to long term growth for Indonesia, especially in investment. A consistent execution and implementation becomes very important, supporting regulations are needed to ensure continuous economic growth.

So far are there companies that already show their interest to relocate to Indonesia?

Anecdotal proof shows that supply chain diversification for Indonesia is already happening. Indonesia Investment Coordinating Board (BKMP) indicates there are seven countries moved to Indonesia with estimated investment up to USD 850 million and employment potential up to 30,000 people. The Coordinating Minister of Economic Affairs stated that the government targeted 143 foreign companies to relocate to Indonesia with employment absorption potential around 300,000 people. It was mentioned that most companies to relocate are from China.

As economic activities reopen, earnings recovery becomes an important indicator that can encourage further bond market strengthening. How are issuers’ financial performance releases in Q3 so far?

So far net profit in Q3 records a good recovery compared to previous quarter, growing +35% QoQ and annual decline has reduced to around -30% YoY. As predicted before, the sector that gave the largest positive quarterly contribution is mostly cyclical sector such as commodity, banking, and discretionary that were under pressure throughout 2020. The number of issuers that recorded profit above expectation also increased. This clearly shows that market expectation is now already very conservative, that a chance for earnings upgrade from consensus number is quite big.

Throughout this year, participations of domestic investors have been very helpful to bond market performance, especially amidst foreign investment outflow from Indonesia. Will the phenomena of domestic investors’ participation continue ahead?

Fundamentally, Indonesia bond market is getting more attractive supported by earnings recovery, macroeconomic stability, and relatively cheap valuation compared to regional countries. As long as the market is supportive – supported by good fundamental mentioned above – then domestic investors’ participation in Indonesia bond market will supposedly continue. We predict that foreign investors’ sentiment on Indonesia bond market will normalize after the pandemic is handled well. In the future, the combination of domestic investors and the hope for returning foreign investors’ investment sentiment will potentially push a more fully and continuously market strengthening.

What is your view on Indonesia bond market growth chance next year? 

We have a more positive view on Indonesia bond market performance next year, supported by these factors:

  • From internal side:
  • Earnings growth recovery trend of companies are parallel with the continued domestic economic recovery.
  • Covid-19 curve that tends to flatten, both the infection and mortality rate, positive development in vaccine distribution is expected to give positive sentiment towards real economy and financial market.
  • Omnibus Law approval that has the potential to be a new source of Indonesia economic recovery.
  • Attractive valuation of Indonesia bond market – as compared both historically and relatively to other asset class – has the potential to encourage bond market strengthening even more.
  • From external side:
  • Supported by US Presidential Election result – as explained above – although predicted to not fully eliminate geopolitical tension related to trade conflict, but it is highly possible that the approach taken will be less confrontative compared to the previous administration, so that market turmoil, especially in developing countries, will decrease.
    Aside from the positive catalysts previously mentioned, what are the risks that need to be paid attention to?
    At least there are two risks investors need to pay attention to:
  • The delay in vaccine availability.
    Vaccine development is one of major factors that trigger market optimism, since it is believed that the vaccine will be the solution to pandemic spread, and will bring life and economic activity back to a more normal state.
  • Regulation reform implementation.

If supporting regulations are not made in time and on target, then it will disrupt economic recovery, because strong supporting regulations are needed to ensure a continuous economic growth. Also, prolonged public refusal can also disrupt economic activity.

As the end of the year is approaching, which is only one and a half months to go, what investment strategy you apply to book a good portfolio performance this year?

To conclude the above discussion, our investment strategy will be focused on cyclical sector that will be benefited by both domestic and global economic recovery next year. Also, we will continue to monitor liquidity and volatility to ensure that investment management gives optimum result 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.
This month, we feature updated market commentaries from Portfolio Manager, Andrian Tanuwijaya. 

Andrian Tanuwidjaya
Portfolio Manager

 

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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