Entering the second half of 2021, is the direction of global economy as expected since the first half still valid?
There are several global themes that we have mentioned at the beginning of the year which are expected to continue in this second half, such as the effect of the US inflation spike which are transitory in nature, and the continuation of the cycle of global economic recovery towards pre-pandemic level. However, entering the second half of this year, two global themes have changed a bit, namely Fed policy normalization plan – expectations of faster Fed rate hikes and stimulus tapering – and new concerns on the spread of Delta variant of COVID-19 in various parts of the world.
Interestingly, the market reaction tends to be neutral and stable in facing the 'tighter' Fed stance, which indicates that the market has anticipated the central bank's tightening policy which is faster than expected. The anticipated tightening measures also lowers US inflation expectations as indicated by the decrease in US Breakeven Rate that can contribute to improving sentiment on financial markets. Meanwhile vaccinations that are boosted in various countries are expected to break the chain of virus spread and mutation.
It was mentioned earlier that the inflation spike is more transitory, can you explain further?
US inflation growth in May reached the highest level since 2008 of 5.0% YoY. Even though the numbers look fantastic, if we examine further, the spike was mainly due to a temporary increase in some inflation component – driven by the reopening of the economy – such as car rentals, used car prices and airline tickets. While inflation components with stickier increases in price, such as housing, are relatively well maintained. Ahead, after the low base effect of the temporary increase in component prices has passed, inflation spike is expected to decrease.
Amidst the various aforementioned sentiments – such as the Fed's policy normalization plan and the spread of the delta variant – how is outlook for Asia?
As with developed countries, the prospects for Asia economy also depend on pandemic management, where each country faces different challenges. But the good news is manufacturing sector in Asia region is still growing well, supported by strong export demand. As part of the world supply chain, the global economic recovery benefits Asia region. Strong commodity prices also helped lift the sentiment. We view that financial assets in Asia are still attractive supported by accommodative monetary policy, and Asia are in a better position compared to the Fed Taper period in 2013. Lower reliance on external financing, better economic resilience and supportive global trends can minimize market volatility. Going forward, the speed of vaccination launching is an important factor that determines how quickly domestic demand can recover.
We have discussed about the current conditions in the global market, how is the outlook of domestic economy entering the second half of the year?
Especially in the second quarter, the domestic economy was actually improving. This reflected in several indicators such as manufacturing, exports, mobility, which had even exceeded pre-pandemic level last year. But unfortunately entering the third quarter, the recovery momentum was hampered by a sharp increase in COVID-19 cases which resulted in the implementation of Emergency Public Activity Restrictions (PPKM Darurat). How big the impact on the economy will depend on how long PPKM will be implemented, because Java and Bali contribute 60% of the total economy of Indonesia. The Ministry of Finance commented that if virus spread can be controlled in July and economic activity can return to normal in August then GDP growth in the third quarter has the potential to reach 5% vs the previous projection of 6.5%.
The government will likely exert various efforts to boost vaccination to break the chain of virus spread and mutation. The government targets 100% vaccination of the vaccine target population by March 2022. The large population of people in developed countries who have received one dose of vaccine – for example 65% of the total population in the UK and 53% of the total population in the US – is expected to ease fears of a global vaccine supply shortage. If all that the government has planned run well, then Indonesia economic recovery is expected to continue on ahead.
Currently, the market's attention is focused on the significant increase in the number of COVID-19 cases. What is your view on Indonesia stock market outlook?
So far, Indonesia financial market has been quite resilient, as reflected in the movement of JCI that is quite stable. The correction that occurred in big caps stocks – as shown in LQ45 performance – offset by gains in some mid small cap stocks driven by specific themes. At this level, negative expectations in some stocks seem to be starting to price-in, so we see this correction is unlikely to continue for too long. Reflecting on the experience of countries that had faced surge in COVID-19 cases, disruption to economy and financial markets tend to be more limited due to adjustments in community activities during the pandemic and the trend of 'forward looking' market participants towards economic recovery, driven by the optimism on the accelerating vaccination rate. More supportive macroeconomic conditions such as the influx of foreign portfolio investment, high export performance, low CAD, and high foreign exchange reserve also help maintain stability of rupiah exchange rate.
What risk factors are you paying attention to currently?
The government budget deficit is one of the risks that we are observing, the implementation of PPKM will require stimulus reintroduction to boost the economy for the lower income segment, so there is a risk of government spending reallocation from sectors that are considered lower priority.
What is your investment strategy to optimize portfolio performance, and what is your current preferred sector?
In our view, the ‘new economy’ related sectors are attractive because it can adapt to 'new ways' of doing business that will become increasingly dominant in the future. Several large banks have also adapted to the current trend; by launching digital applications and taking advantage of the ecosystem they currently have with also much bigger scale compared to some of the new digital banks that have just appeared later. In addition, we also see opportunities in several big cap stocks that have been corrected, to recover once the pandemic situation improves in the next several months.
Seeking α adalah komunikasi bulanan yang dirilis oleh PT Manulife Aset Manajemen Indonesia (MAMI). Disampaikan dalam format Tanya-jawab, Seeking α ditujukan untuk menyajikan pandangan para ahli investasi MAMI yang berorientasi ke depan, langsung ke hadapan Anda, para investor profesional MAMI.
Bulan ini, kami mengetengahkan komentar pasar terkini dari Senior Portfolio Manager - Equity, Caroline Rusli, CFA.
Caroline Rusli, CFA
Senior Portfolio Manager - Equity
Memiliki izin Wakil Manajer Investasi dari Bapepam pada 22 Februari 2005 berdasarkan Surat Keputusan Ketua Bapepam & LK No. KEP-26/PM/WMI/2005. Caroline memulai karirnya di PT Panin Asset Management, kemudian ia bekerja di PT First State Investments Indonesia. Caroline memperoleh gelar Bachelor of Economics dari University of Tokyo, Jepang.
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