Regional
Strategy: IDR And MYR Weakens On US Rate Hike Expectations
The 5 Dec launch of the Shenzhen-HK Stock Connect would be
positive for select small-cap HKEx-listed stocks. After the US presidential
elections, there are increased expectations of US interest rate hike. This has
caused both IDR and MYR to weaken sharply against USD. For Indonesia, we expect
a stronger market after the Dec FFR hike, with a possible 25 bps BI benchmark
rate cut in early 2017. Malaysian rubber gloves, tech and timber sectors would
benefit from the stronger USD. Thailand’s likely revival of the holiday
shopping tax break could add to its GDP growth.
Indonesia
Strategy: Managing
Volatility
We
opine that Indonesia’s fundamentals remain pointed towardslong-term positives.
This is underpinned by BI’s pro-growth policies to propel economic growth, the
low inflation environment,continued government focus on infrastructure
spending, and the security forces’ exemplary conduct in maintaining stability
as political tensionsrise. Thus, we expect stronger market direction post the
Fed’s anticipated rate hike in December.
¨
Outflows
dominate. Worries
over a potential US Federal Reserve (Fed) rate increase and weakening IDR have
triggered outflows in both the equities and fixed income markets. This is a
reversal after months of inflows. Post Donald Trump’s win in the recent US
elections, the JCI continues to trade at sub-5,200 level, with outflows
recorded at IDR9.6tnin November. Similarly, outflows in the fixed income market
have deepened, reaching IDR17trn over the past month, with the 10-year
government bond continuing to escalate to 8.3% (August: +6.3%). Arguably, a
lack of catalysts in the market have also led to the insipid performances, and
we are only expecting stronger market direction post the Fed rate increase that
is expected by mid-December.
¨
The
three spectres are currency,
interest rate trends and politics. As highlighted in our 14 Nov 2016 Currency
Woes Dampen Sentiment report, the fundamentals still point towards a
resilient IDR. This is underpinned by its high-yield differential vs developed
market (DM) economies and peers, relatively high levels of growth among major
emerging market (EM) economies, and ongoing reforms. Rising current account
deficit (CAD) over the next few years is still manageable, while forex reserve
levels also improved to USD115bn.
¨
Action
by Bank Indonesia (BI) to intervene in the currency market is plausible to
indicate direction. An influx of asset repatriation is also expected towards
year-end, which would help the IDR to recuperate to a more favourable level. We
opine that BI would maintain its current relaxation bias policy to propel
economic growth, especially given the subdued inflationary outlook. As the series
of rate cuts have yet to result in a meaningful economic trajectory, it is
unlikely that the central bank would take the risk by reversing its current
relaxation policy.
¨
Over the
past five years, the spread between the BI rate and inflation has averaged
130bps vs the current 145bps spread. This provides room for further relaxation
if needed. We expect BI to maintain its current benchmark rate until year-end,
and potentially make another 25bps cut in early 2017 to further support
economic growth under stable IDR circumstances.
¨
Jakarta
Governor Basuki Tjahaja Purnama’s alleged religious defamation has raised the
political landscape’s temperature, as seen by the magnitude of the anti-Basuki
rally that occurred earlier this month. This upheaval is negatively perceived
by investors, especially after >2 years of stable politics. The market is
likely to take heed of the next rally and, more importantly, how the Government
handles the situation. So far, the security forces have been exemplary in
restoring stability. We continue to believe that the Government’s position
remains strong. As long as these forces remain united under presidential
control, any act that destabilises the country can be brought under control
quickly.
¨
Commodity
plays and blue chips. We like PP London Sumatra (Lonsum) and United Tractors as
commodity plays. Bank Negara Indonesia (BBNI), Astra International, Ciputra
Development, Bumi Serpong Damai (BSD), Telekomunikasi Indonesia (Telkom),
Indofood Sukses Makmur and Waskita Karya are all stocks with strong
fundamentals. (Helmy Kristanto)
Helmy Kristanto
Director
Head of Indonesia
Research
PT. RHB Securities
Indonesia
