Market Update Bancassurance December 2020

Amidst the pandemic that affects the economy, bond market managed to post positive performance this year. What factors supported this?

Bond market recorded good performance this year, according to BINDO bond index by the end of November bond market strengthened by 12.68%. Amidst economic uncertainty, bond asset class becomes one of the options for investors to reduce portfolio risk. Generally bond market performance is supported by several factors:

  • First factor is global interest rate cut trend, including in Indonesia. This condition is supportive for bond market, as investors tend to seek more attractive yield in the midst of lower interest rate trend.
  • Second factor is stimulus from central banks which improved liquidity in financial system. High liquidity in financial system improves demands for bonds, since banks that have excess liquidity tend to allocate their excess liquidity in bonds.
  • Third factor is central bank and the government that succeed in maintaining credibility. The role of government and regulator in implementing correct and credible policies is very important to maintain market confidence during volatile market condition. Generally the government and Bank Indonesia have succeeded in doing that, as indicated by strong demand from domestic investors, and foreign investors that have returned to Indonesia bond market.

With strong 2020 performance, how do you view 2021? Is there still attractive potential from bond market?

We see 2021 as the year of economic recovery, continuing the theme of from second half of 2020 where economic data started showing improvements. Macroeconomically, we see some factors that can be the market main theme in 2021:

  • Monetary and fiscal policies are still accommodative in global and domestic market to support economic recovery process.
  • The return of foreign funds to developing countries market to seek yields or growth potential in developing countries financial assets in the midst of low inflation and interest rate of global central banks.
  • Weak USD trend likely continue in 2021 because of accommodative US monetary and fiscal policies. Meanwhile IDR fundamental remains solid with low inflation, space for further rate cut, and foreign inflow potential that makes Indonesia bonds to remain attractive.
  • Demand from local investors are expected to remain supportive in 2021, because of ample market liquidity as fiscal and monetary policies remain accommodative, while credit growth is still relatively low.
  • Vaccine availability and distribution will be a key factor that can be both catalyst for the market, but also a risk factor.

We see those factors above as supporting factors for Indonesia bond market in 2021. Indonesia bonds still offer attractive real yields among other developing countries. For example, real yields of Indonesia 10-year bonds is around 4.6%, while the Philippines is 0.5% and India -1.7%, which makes Indonesia bonds highly attractive. With those global and domestic dynamics, we predict 10-year government bond yields may lower to 5.5-6.0% in 2021, which will still give upside potential for investment in bond market.

Joe Biden has been elected as US President in the election last November. How will this change in US leadership affect the market?

Trade policies with confrontation was the trademark of President Trump’s era of leadership, which wasn’t responded positively by the market because it created uncertainty and increased volatility. Meanwhile, Joe Biden is predicted to take a different approach, in which he will more likely take diplomatic approach and multilateral cooperation. This approach is predicted to lower uncertainty factor and volatility in the market, which in turn will create more conducive investment condition, especially in Asia region.

The market also welcomes the appointment of former Fed Chair Janet Yellen as Treasury Secretary. Yellen is seen as more capable to cooperate with The Fed so that the direction of fiscal and monetary policies can be more in line and effective. This condition is different with Trump era where the Treasury Secretary Steven Mnuchin in several occasion had different viewpoints with The Fed. President Trump also made some statements that contradicted with The Fed which created uncertainty in the market. As a whole, Trump unconventional leadership often created uncertainty and volatility in the market. While Joe Biden is considered as a more conventional politician so that the direction and communication of his policies is predicted to be more consistent, which in turn will decrease market uncertainty. 

Not only Joe Biden’s election that changes market sentiment, but also congressional election results are predicted to be supportive to market sentiment. At the moment, split congress condition – where Democrat holds majority in the House, while Republican is the majority in the Senate – is predicted to happen, which will be a good scenario for the market. With split congress, US fiscal policies are predicted to stay moderate and not too progressive. With this scenario, US fiscal deficit will be more manageable and US Treasury yields will stay in a relatively low level which will increase the appetite for Emerging Markets bonds.

Rating agency S&P maintains BBB rating for Indonesia but revised the outlook to negative. What is your take on the risk of rating downgrade for Indonesia?

Outlook revision to negative was not caused by fundamental condition, but due to the risks of external and fiscal condition caused by Covid-19 pandemic. To support the economy, the government widens fiscal deficit target to 6.3%, which previously was limited to 3%. Actually many other countries also apply this policy during the pandemic to give stimulus to the economy. In our opinion the deficit widening by the government is still within a reasonable limit. As long as the government can maintain the credibility of fiscal posture and policy communication to the market, we think Indonesia can maintain its rating position. We think it’s a good sign that Indonesia can maintain its rating so far, because in current situation many countries are experiencing rating downgrade. Fitch Rating agency lowered the ratings of 33 countries just in first half of 2020, including UK.

What do you think about corporate bonds? With the current economic condition, is it prudent for investors to have exposure in corporate bonds?

Corporate bonds still have part in investor’s portfolio because they offer bigger yield than government bonds with the same tenor, so that they can be an added kicker to portfolio performance. And in line with government bonds market movement, corporate bonds can also catch the upside from lower bond yield environment.

But in current economic climate, investors need to assess the default risk corporate bonds, which can happen if the issuer’s financial condition is unhealthy. To mitigate this risk, fundamental analysis becomes very important in choosing corporate bonds. Internally we have a team of experienced analysts that regularly monitor the bonds in our portfolio to ensure the companies are in healthy condition.

What is your portfolio management philosophy and what strategy you apply to gain alpha in the current market condition?

We have active portfolio management philosophy that is based on fundamental research. This philosophy gives flexibility to adapt portfolio position to the latest market condition so that we can gain optimal risk-return tradeoff. We also utilize Manulife Investment Management’s global network to get viewpoints of local analysts about market condition and global investors’ sentiment that can affect risk appetite on Indonesia bond market.

At the moment we have positive view on the potential of Indonesia bond market, supported by several factors such as attractive real yield, the potential of foreign inflow to emerging markets including Indonesia, interest rate that is still accommodative, and ample liquidity in financial market that give support to bond market. Portfolio duration position is overweight against the benchmarks to catch alpha for portfolio.



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 Director & Chief Investment Officer – Fixed Income, Ezra Nazula. 

Ezra Nazula
Director & Chief Investment Officer – Fixed Income


Responsible for fixed income investment management. Acquired Deputy Investment Manager license from Capital Market Supervisory Agency and Financial Institution (Bapepam-LK) according to decision letter of Chief of Financial Services Authority (OJK) No. KEP20/PM/WMI/2005 on February 15th 2005. Ezra started his professional career at Chase Global Funds, Boston, MA, USA and continued his career at Panin Securities and HSBC Jakarta. He joined PT Manulife Aset Manajemen Indonesia for the first time at 2003 before decided to join AIA as Head of Investment and back to PT Manulife Aset Manajemen Indonesia on November 2011. Ezra acquired MBA title from Northeastern University, Boston, USA.





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