JCI posted a negative performance of -4.11% in March, what factors have overshadowed the performance of the Indonesian stock market?
Market sentiment was overshadowed by fears of soaring inflation in US as the vaccination process went well and President Biden's massive stimulus could accelerate the economic recovery. Along with rising inflation, it is feared that the Fed will also tighten monetary policy more quickly to mitigate spikes in inflation. This sentiment was reflected in the soaring yields on US Treasury (UST), which rose from the 0.9% range at the end of 2020 to the 1.7% range at the end of March 2021.
UST is an important instrument in global financial market because it is used as a reference for risk-free assets and is one of the reference metrics for various other financial instruments globally. UST yields can also indicate market expectations of economic conditions and the direction of the Fed's monetary policy. Therefore sudden spike in UST yields caused uncertainty and volatility on global financial markets.
How do you see the movement of US Treasury yields ahead?
We see that the current US Treasury yield hike reflects a more positive market expectation for economic growth. We do not see the threat of a prolonged surge of inflation in the US that will force the Fed to tighten monetary policy. Fed Chair Jerome Powell has on several occasions said that the surge in inflation is temporary and the Fed is still committed to maintaining accommodative monetary policy going forward. US economy is still in a recovery phase and the unemployment rate is still relatively high at 6%, far from the 3.5% before the pandemic, so that inflationary pressure is still relatively weak despite fiscal stimulus.
In the future, UST yields may still move upward in line with the improving economy of the US. However, we view that the increase will be more limited and gradual due to the following factors:
• Plan of tax increases proposed by Joe Biden's government.
• The pace of recovery that tends to be slower than expected in line with the risk of the 'third wave' of COVID-19 in several regions.
• Higher demand for UST by global investors UST yields are getting more attractive.
A more gradual increase in UST yields will ease market concerns and may restore global investor sentiment. The current UST yield rate, which is around 1.7%, is actually still relatively low, because in the past 10 years the average UST yield has been around 2.0%, so the current UST level is still at a reasonable level and remains supportive to financial market.
The additional US stimulus proposed by President Biden is expected to boost US economic growth. Does this condition risk diverting fund flow from Asia to US market due to the potential for US economic growth to be more attractive?
US economic recovery actually also has a positive impact on Asian countries, especially countries that have an important role in the global supply chain, such as China, South Korea and Taiwan. US economic recovery will increase the demand for production goods from these countries so that it will have a positive impact on the economy. As an illustration, a 1% increase in American GDP is estimated to boost the GDP of China and South Korea by about 0.12%.
Besides, several Asian countries are currently also in relatively better economic conditions than the US due to effective handling of the pandemic so that the economy is recovering more quickly. For example, China is one of the large economies that has handled the pandemic well and its economic recovery is very fast, where in the first quarter of 2021, the economic growth is estimated to reach the range of 15 - 20% YoY, and in 2021 can reach the range of 7 - 9%. Therefore we remain optimistic that global investors will not turn their backs on Asia stock markets.
Speaking of Asia, how do you view the geopolitical tensions between the US and China in the era of President Biden and how is the impact on stock market?
It seems that the tension between the US and China will remain in the era of the Biden administration. However, Biden's method will be different from Trump's and will be more predictable, so that the impact of sentiment on the market is relatively more preserved. Compared before, President Trump's sporadic communications through social media created a climate of uncertainty for the market.
Despite the political rhetoric of the two countries, US and China actually need each other economically. US, as the world's largest consumer country, will still need China's extraordinary production capabilities. In addition, China also has an important role in the global supply chain in various industries that are difficult to replace. For example, China has an important role in the global pharmaceutical industry, where China has 90% of the production capacity for vitamin C and penicillin.
For Indonesia stock market, so far we see that the impact of this geopolitical tension is more sentiment in nature and does not affect market fundamentals. Indonesia maintains good diplomatic and trade relations with the two countries so that our economic activities are not disrupted.
Amid soaring UST yields, are you worried that the risk of taper tantrums like in 2013 could be repeated?
Currently, we do not see the risk of the Fed engaging in tapering (reducing asset purchase program) due to communications from the Fed which remains accommodative and the US economy is still recovering. However, if tapering occurs, Indonesia's current macroeconomic condition is in better position than 2013 so that it can be more resilient in facing external shocks. The current account deficit in 2020 is only 0.5% of GDP, lower than 3.2% in 2013. In addition, Indonesia's exports are currently on a growth trend supported by significant growth in exports of palm oil and steel, in contrast to 2013 where export performance declined due to weaker coal prices. Various other metrics such as inflation, foreign exchange reserves, foreign ownership in bond market, and Indonesia's sovereign rating are currently better than 2013.
With the current volatility of Indonesia stock market, how do you see the outlook for Indonesia stock market ahead?
Our investment philosophy believes that fundamental factors are the main drivers of long-term stock market performance. Currently, we see that Indonesia's economic fundamentals are pointing to a better level than last year so that it can have a positive impact on stock market performance. Several factors also support our supportive view on the stock market:
• Improving vaccination process that can encourage economic recovery and the confidence of the public and businesses.
• Policies from the government and Bank Indonesia that are more proactive to support economic recovery through various incentives, such as in the automotive and property sectors.
• The earnings growth of companies are expected to improve in 2021 compared to the contraction that occurred in 2020.
What is your portfolio management strategy in the midst of current market volatility?
The market corrections that have occurred opened up opportunities for us to gradually enter several sectors that have attractive potential amid the current market dynamics. Commodity sector is a beneficiary of the global economic recovery and focus on green economy. Telecommunications sector is also attractive, as the sector is removed from Government’s negative investment list, thus opening up the potential for foreign investment. In addition, property sector has become one of attractive sectors supported by government incentives that can increase market demand for property.
Amid a very dynamic market condition, we continue to monitor the latest developments in the global and domestic markets, and take advantage of Manulife Investment Management's global network to obtain the latest analysis that can help our investment team to form an optimal portfolio position.
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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