Market Update Bancassurance August 2021

Anticipating normalization of central bank policy, especially in the United States, seems to be one of the main considerations for the direction of investment strategy in the second half of 2021. What is your comment on this?

Right, Fed policy normalization is one of the important factors in portfolio management this year. As the market anticipated, the trend of economic recovery in the United States (US) – indicated by rising projections for GDP growth and inflation – caused a shift in the Fed's monetary policy from very loose to tighter. Although tighter monetary policy has the potential to reduce global liquidity and put pressure on bond markets, but the Fed's ultra-gradual approach and direction is expected to make the negative impact of said monetary tightening more limited (unlike the taper tantrum in 2013). It can be said that the Fed's tightening policy and its impact on rising US Treasury yields have been priced-in by the market since the beginning of the year. Besides, US economic growth, which is estimated to have peaked in the second quarter, has the potential to affect the release of US economic data in the future to become more moderate, so that expectations for recovery in economic growth and inflation have become more limited. This condition can affect the volatility of the movement of US Treasury yields to be more controlled.

 How much influence does this normalization policy have on Indonesian bond market?

US monetary and fiscal policies as one of the largest economies in the world certainly have an influence on other countries, especially developing countries such as Indonesia. Its influence can be felt through movements in interest rates, bond yields, and domestic exchange rates. Although tighter US monetary policy has the potential to affect the movement of domestic bond yields and rupiah exchange rate, but as mentioned before, The Fed's ultra-gradual approach and monetary tightening policy that has been priced-in by market players has the potential to keep the volatility of US Treasury yields under control. 

Fundamentally, Indonesia’s economy is also getting better. Several indicators such as the current account balance, inflation, and foreign exchange reserves showed significant improvements, so that this condition could make Indonesia stronger/more agile in facing US central bank policies normalization. In the future, if there is an increase in US Treasury yields – as long as the increase occurs gradually – it will have a constructive impact on Indonesia’s economy and financial market.

Compared to the stock market, Indonesia bond market performance looks more 'resistant' to the explosion of Covid-19 cases. What is your comment on this?

The explosion of Covid-19 cases after the last Eid al-Fitr holiday had been predicted and anticipated by the government and bond market players. Therefore even though the number of Covid-19 positive cases jumped above the government's expectations, it did not have a bad impact on the bond market. Bond market’s better resilience this year was supported by several positive factors including;

  • Abundant domestic banking liquidity due to credit growth which is expected to remain low.
  • Rupiah stability.
  • Bond valuations that are still attractive in which Indonesia's real yield is one of the highest in the region.
  • Stable US Treasury yields movement.
  • Decrease in selling pressure from foreign investors considering their holdings in domestic bonds are already quite low (<23%).
More positive sentiment in domestic and global markets has the potential to move the yield on 10-year rupiah-denominated government bonds to fall deeper than the current level.

Slowing economic growth as a result of the implementation of Emergency Public Activity Restriction (PPKM darurat) is certainly a risk factor that needs to be observed, especially in corporate bonds. What investment strategy is applied to manage credit risk in corporate bonds?

To minimize credit risk on corporate bonds, we implement three main strategies, including;

  • Strict internal credit analysis that includes ongoing review and monitoring.
  • Set investment weighting limits on each issuer's name in accordance with the internal rating given.
  • Reduce the risk of concentration in certain sectors by diversifying into several different business sectors.
Especially during the pandemic, investment selection is focused on high-quality companies, namely companies that have good fundamentals, strong credit profile and parental support, and are not too vulnerable to the impact of changes in the economic cycle. So far, the implemented investment strategy has proven successful in providing a good performance boost to portfolio with relatively low level of volatility. Going forward, we will continue to analyze the impact of economic conditions on corporate bond issuers in the portfolio.

What positive catalysts can we look forward to for the bond market in the second half of the year?

In general, there are two important factors that can support the movement of bond market, which are interest rate cycle and mechanism from the supply/demand side;

  • The need to maintain rupiah stability, controlled inflation and efforts to stimulate the economy have made Bank Indonesia to maintain accommodative monetary policy that had positive impact on bond market. Relatively positive macro conditions contributed to attractive Indonesia bonds real yields.
  • The government's move to reduce bonds supply in the second half is a positive catalyst that can support the movement of bonds towards the end of the year. The government reduced its debt financing target this year by IDR283 trillion to IDR924 trillion. The government plans to use Budget Surplus (SiLPA/Sisa Lebih Pembiayaan Anggaran), which has the potential to reduce the financing target by around 24% lower than the previous target. The government also plans to optimize retail bond issuance which is expected to increase the enthusiasm of domestic investors to invest in bond market.
Effective and fast handling of the pandemic is also needed to encourage more positive sentiment in the bond market.

We have already mentioned positive catalysts to look forward to, what about the risks that we need to pay attention to?

Risk factors we pay attention to from the external side are volatility in US Treasury yields, flight to safety in US dollar, geopolitical tensions, and changes in The Fed policy communications. Meanwhile risk factor from the internal side is the slowdown in domestic economy caused by restrictions on public activities, which affect the outlook for Indonesia's debt rating and its impact on government's budget deficit.

Amidst the current conditions, what investment strategy is applied to generate alpha on bond portfolio performance?

Considering Indonesia bond market outlook, which still offers good upside potential, we assess that the current level is still quite attractive for investors to invest.

  • We maintain our portfolio of rupiah-denominated bonds assets at a tactical overweight duration – both for short and medium duration portfolios – taking advantage of the potential for reduced bond supply, high domestic liquidity and increasing foreign appetite in Indonesia bond market.
  • In order to minimize risk and to maintain stability in dollar-denominated bond portfolio, the duration is maintained at ± 3 years.
Duration management, security selection, and yield enhancement are expected to support portfolio performance this year. In addition, we also continue to monitor liquidity and volatility to ensure that investment management provides optimal returns with controlled risks.






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

Laras Febriany
Junior Portfolio Manager - Fixed Income


Laras bergabung dengan PT Manulife Aset Manajemen Indonesia sebagai Fixed Income Dealer dan karirnya terus berkembang hingga akhirnya Ia dipercaya menjadi Junior Portfolio Manager – Fixed Income. Sebelum bergabung dengan MAMI pada Juli 2017, Laras bekerja di PT Bahana Securities, Jakarta, sebagai Fixed Income Sales. Laras memulai karirnya di PricewaterhouseCoopers Indonesia dan menjalani internship di Citibank N.A, di Trading Desk, Global Market, setelah lulus dari Universitas Indonesia pada tahun 2011





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