Monthly Market Commentary

Monthly Commentary October 2015

CAPITAL MARKET OVERVIEW.
The month of October 2015 was seen as a signal of improving economic condition in Indonesia from September low. The JCI index moved +5.04% MoM from 4,223.9 to 4,455.1 at the end of the month. The biggest industry movers for the month were Miscellaneous (+9.27% MoM), Construction (+7.80% MoM) and Finance (+5.07% MoM), while Consumer and Trade booked negative returns of -1.10% MoM and -2.44% MoM, respectively. Additionally, individual equity gainers were the big names BBRI, ASII and BMRI, while UNVR was the biggest loser. Foreign ownership posted net sell of IDR 249bn for the month, though the percentage of foreign ownership in the equity market had increased from 63.1% in Spt-15 to 63.5% in Oct-15.

Overall earnings report for the 3Q15 was below expectation but not the worst. The JCI PE had de-rated slightly below the 10-year mean, while its P/BV has dipped to 1.3 standard deviation below mean. Most of the results were mixed in the Consumer/Retail sector while the Property sector experienced the weakest earnings across the sector mostly due to FX losses and overall weak demand for property. Despite the weaker than estimated earnings result, the Rupiah has strengthen against the USD in Oct-15 from IDR 14,603 to IDR 13,689 (+6.02% MoM) at the end of the month. The strengthening and persistence of Rupiah stabilized in the month despite an outflow of EM funds during the Fed Rate announcement, which saw the currency as one of the best performing MoM for ASEAN and EM countries.

BOND MARKET OVERVIEW.
As for the bond market, the outlook in the month was positive. The foreign ownership of SBN had decreased in Oct-15 to 37.1% from 37.6% in the previous month. This occurred despite the increase in the total value of foreign ownership from IDR 523.27tn in 1-Oct-15 to IDR 528.76tn in 30-Oct-15. Part of the reason is because the overall increase in SBN issuance from IDR 1,388tn to IDR 1,425tn in the month was mostly bought by individuals that saw the percentage of ownership increase from 2.06% to 3.67% or from IDR 28.6tn to IDR 52.32tn (+83% MoM). Furthermore, the 10-year government bond demand in Oct-15 posted a positive prospect shown from a decline in the yield from 9.60% to 8.88% at the end of the month (Note that the price and yield of bond securities have inverse relationship).

DOMESTIC MARKET OVERVIEW.
The October outlook for the Indonesian economy was somewhat positive and showed an improvement trajectory. 3Q15 GDP report was 4.73% YoY although below the market consensus of 4.8% YoY. Most of this was contributed by the increase in Government Expenditure from 2.28% YoY in 2Q15 to 6.56% YoY as well as the Gross Fixed Capital Formation (GFCF) from 3.55% YoY to 4.62% YoY, respectively. The movement of GDP by industry was also satisfying as we are seeing some of the fruits of the government capital spending towards infrastructure. The Manufacturing sector growth was flat at +4.3% YoY in the quarter, although there was good news from the Machinery investment growth of +15% YoY. Additionally, the Telecommunication (+10.8% YoY), Financial (+10.3% YoY), Transportation (+7.1% YoY) and Construction (+6.8% YoY) had posted 3Q15 higher growth than the GDP, making them as the best performing sectors in the country.

Furthermore, the inflation outlook in Indonesia is also improving, suggesting that there might be a possibility for Bank Indonesia to decrease the BI Rate from 7.5% in order to spur economic growth. The CPI had decreased -0.08% MoM in Oct-15 to 6.25% YoY compared to 6.83% YoY in the previous month. This deflationary period was attributed from Food price movement that had declined -0.22% MoM, mainly for chilies and chicken meat prices. What is even more important is that the Core Inflation (excluding volatile price shocks) had decreased by -0.05ppt from 5.07% YoY to 5.02% YoY. The market expects that the last two months of the year would post deflationary period to around 4% – 4.5% inflation coupled with the stabilizing USD/IDR, making it highly likely that BI rate would be lowered at the beginning of FY16 right after the Fed meeting in December-15.

The Bank Indonesia had decided to keep its BI rate unchanged at 7.5% at their October meeting. A possibility of interest rate policy easing was apparent as the central bank is keeping a close eye on the inflation and Rupiah stability outlook in the near term. The domestic economy was also bombarded with 4 new economic policy packages aimed at boosting the economy. The packages involved improving consumer spending power by lowering basic energy prices, wage growth determination that includes taking into account inflation and GDP growth, new tax regime for asset revaluation and Real Estate Investment Trusts (REITs) and, finally, deliberation of the Special Economic Zone policies that includes ownership by foreigners.

INTERNATIONAL MARKET OVERVIEW.
Two of the most watched countries in the month of October were China and US. The Chinese economy had a bleak outlook where its 3Q15 GDP grew at 6.9% YoY below the 7% that the market had anticipated in 3Q15; the slowest pace since the GFC. As for the GDP breakdown, the service industry grew 8.4% in the first nine months of the year, while the secondary industry – including manufacturing – grew only 6%. Furthermore, the Chinese PMI that indicates the health in the manufacturing economy posted a contraction level of 49.8 although it was an improvement from 47.2 in Spt-15 and an indication of a stabilizing trend.

In light of the weak economic data, the Chinese government and the PBOC had decided to provide further stimulus to boost the economy and to support the Chinese stock market by lowering reserve requirement and lowering deposit and lending rates. We have yet to see the long-term impact of this intervention, however we have seen the bench mark Shanghai Composite Index rallied 20% or USD 1.6tn share price recovery despite the trailing 3Q profits 68% below the overall market estimate. It has been projected that around USD 102bn had been poured into the stock market due to strong liquidity prospect that had made the Shanghai Composite PE level surged at 18 that is 38% more expensive than the 5-year average, although it’s still below the 25 PE peak in July. Since most of this appreciation is due to speculation not fundamental, we expect the stock rally to ease and to experience correction in before the end of year or beginning of FY16.

Meanwhile in the US, the 3Q15 GDP growth was 1.5% QoQ below the 3.9% QoQ growth in 2Q15. The slowdown is based as overall expenditures deteriorated such as in investment (-0.97%) and net export (-0.03%) due to weak domestic and global demand. Having said that however, the prospect of FFTR increase in Dec-15 was only 50% based on market consensus until Chairwoman Janet Yellen mentioned that there is a possibility given stable and strong economy data – including non farm payroll published tomorrow – to hike FFTR by year end. This announcement increased the market probability of FFTR hike in Dec-15 from 33.4% to 56%. Overall, the months ahead would be an interesting time as we await the Fed’s decision and hope for a better outlook in the Chinese and global economy.

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