Fed tapering is a hot topic that continues to be discussed in the market. Exactly what is meant by Fed tapering and why is it getting the market's attention?
To stimulate the weakening economy during the pandemic, the United States central bank (The Fed) provided economic stimulus in the form of an overflow of liquidity to the economy by buying assets from the financial market for USD120 billion per month. This has been done since March 2020. But, with the current improving economic conditions in the United States, there is a possibility that the stimulus no longer needed, and will be reduced gradually. This action of reducing stimulus or reducing the amount of asset purchases is what is meant by tapering.
Possibility of Fed tapering has become a hot topic in the market, because the tapering process carried out by the Fed earlier in 2013 caused high volatility in global financial markets, especially for emerging markets that experienced outflows of foreign funds, weakening stock and bond markets, depreciation of the exchange rate, and widening current account deficit. Therefore, there is concern in the market whether the volatility like in 2013 could happen again in this current tapering.
What is your view regarding the current Fed tapering, can high volatility occur again like in 2013?
Currently, global financial markets are more prepared to face Fed tapering, so the risk of a market panic like in 2013 is lower. 2013 was the first time in The Fed's history that tapering had been done, so there was a lot of uncertainty in the market about how this tapering process would be carried out and whether the economy had recovered enough to face the reduced stimulus. The lack of transparency in The Fed’s communication at the time also raised concern.
The current condition is different, the market already has an idea of how the tapering process will be carried out, learning from the process that occurred previously in 2013. Communication from The Fed at this time is also better in signaling that tapering will be carried out in advance so as to provide transparency and calm for the market. This is reflected in market conditions which remained stable at the end of August after The Fed signaled possibility of tapering at the end of this year, in stark contrast to the high market volatility in May 2013.
Apart from these psychological factors, current economic conditions are also relatively better than in 2013 both in the United States and in emerging markets. American economic indicators such as unemployment rate, economic growth, and inflation are currently better than in 2013. Meanwhile, emerging markets – which were severely affected by the tapering in 2013 – also had better macroeconomic conditions, as can be seen in higher foreign exchange reserves, low inflation, high trading activity, and better corporate performance so that they are better prepared for Fed tapering.
How do you see Indonesia's current economic condition facing Fed tapering?
To analyze Indonesia's economic condition, we can do a SWOT (strength, weakness, opportunity, threat) analysis:
Indonesia's strength is economic fundamentals that remain stable in the midst of the pandemic. Macroeconomic stability is an important factor to maintain investment attractiveness in Indonesia. Foreign exchange reserves are at historically high levels, and a trade balance surplus keeps the current account deficit at a low level. In addition, macroeconomic stability is also supported by the credibility of the government and central bank, which is crucial to maintain investor confidence in Indonesia.
Increasing vaccination is still a challenge, so far Java-Bali has become government's focus due to high mobility and being the center of economic activity. Outside Java-Bali, vaccination rates are still relatively low; vaccine availability and distribution are the major challenges. In addition, the weakening of economic activity caused by the pandemic caused tax ratio to decrease. This condition becomes a challenge amid the need for financing that remains high for economic recovery and pandemic mitigation.
New economy sector has the potential to become a source of new economic growth for Indonesia. The high potential of Indonesia's digital economy encourages various technology companies to develop their business in Indonesia. Research from Google, Temasek, and Bain estimates that Indonesia's digital economy can grow 23% per year until 2025, much higher than Indonesia's nominal GDP growth. In addition to digital economy, Indonesia also has potential in renewable energy sector. Indonesia has the world's largest nickel reserves, the main raw material for batteries for electric vehicles (EV), which opens up opportunities for us to play an important role in the global supply chain of EV industry.
The short term challenge is market reaction to Fed tapering. However, with markets that are better prepared for tapering, better communication from the Fed, and better domestic macroeconomic conditions compared to 2013, the risk of market volatility related to tapering is lower this time around.
Overall, challenges and market dynamics will always exist for Indonesia financial market from time to time. But we believe in the attractiveness of investment in Indonesia market due to the support of good economic fundamentals, and opportunities in new economic sectors that can be a source of economic growth going forward.
The government and Bank Indonesia have extended the burden sharing scheme until 2022. What is your view on this policy?
We think this is positive for financial market. This policy can help the government in financing the economic recovery pandemic mitigation stimulus. The scheme can help reduce the burden of interest payments on government debt, amid an increasing ratio of interest payments to budget revenues from 10.9% (2015-2019 average), to 17.8% in 2021. Apart from the fiscal side, this burden sharing scheme is also positive for bond market because it can reduce bond issuance target at bond auctions this year and next year.
The risk of this burden sharing scheme is the potential for moral hazard and investors' perceptions of the credibility and independence of Bank Indonesia. But the existence of a clear mechanism and limits related to this burden sharing scheme makes us optimistic that investors' perceptions on the credibility and independence of Bank Indonesia will be maintained. So far, market response to the extension of burden sharing has been quite positive, as seen from stable government bonds yields and strong investor interest in Government bond auctions at the end of August.
Technology sector shares in JCI recorded the highest performance so far this year until August (+486.7%). Is this merely a temporary euphoria?
In our opinion technology sector has an attractive long term outlook. Indonesia has a large population so that the potential of Indonesia's digital economy is also very large. As previously stated, Indonesia's digital economy growth can reach 23% per year until 2025, becoming the largest in ASEAN. Meanwhile, technology sector has not been well represented in JCI, where the weight of technology sector in JCI is only around 6.5%, while in overseas stock indices it has a much higher weight, as in the MSCI Asia Pacific index, the weight is in the range of 18.8% or in MSCI World which reached 22.5%. Increasing the weight of technology sector in Indonesia stock market can increase Indonesia's attractiveness in investors’ eyes. We are therefore positive about technology sector outlook in Indonesia, and its growing role in Indonesia stock market.
What is your advice for investors who are confused about investing in stock mutual funds or bond mutual funds?
Both have a place in investor portfolios, where in the current economic recovery cycle, stock asset class benefits from the potential for economic recovery and improved performance of companies as the economy reopens. While bond asset class offers stability supported by low interest rate environment and government fiscal policies that are supportive to bond market.
Investment decisions should be adjusted to investors’ risk profile and financial goals because these two factors will have more influence on the long-term performance of the portfolio. On the other hand, market timing can increase the risk of losing market momentum or making wrong decisions.
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Bulan ini kami mengetengahkan komentar pasar terkini dari Chief Economist & Investment Strategist, Katarina Setiawan.
Chief Economist & Investment Strategist
Katarina bergabung dengan PT Manulife Aset Manajemen Indonesia (MAMI) pada 1 Juli 2013. Ia memperoleh izin Wakil Manajer Investasi dari Bapepam-LK pada 30 April 1999 dengan no.: KEP-28/PM/IP/WMI/1999. Ia telah memiliki pengalaman selama lebih dari 20 tahun di industri keuangan dan pasar saham. Sebelum bergabung dengan MAMI, Katarina bekerja di Kim Eng Securities sebagai Research Director. Sebelumnya Katarina bekerja sebagai Director di IBAS Consulting, Director di Omni Nusantara dan Supervisor Consultant di Arthur Andersen & Co. Katarina menyandang gelar Master of Business Administration dari Indiana University di Bloomington, USA.
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