Flows
The Indo equities market
Lingering concern over European sovereign debt contagion continued to overshadow markets globally and selling out of the US lead JCI lower again today, -2.3% as of this writing. Small caps lead while selling in big caps across the board with ASII, BBRI, BBCA, BMRI, TLKM.
Across the region, we see nervousness but no panic. We kick off this morning with our order pad ~40% higher than average with a 3:1 net sell skew in the region. At this point in time, Indonesia has not seen significant foreign selling.
The Indo bond market
The Indonesia government 10yr closed yesterday at 9.3% after ending the day before at 8.8% and trading as high as 9.6%. Today, our fixed income colleagues expect yield to trade higher as buyers are standing back. Small bids on bonds are on the low side. The tone today is "go ahead, please sell if you want, but at low price" versus yesterday "yes, it may be a good window of buy opportunity".
The Indo FX market
Our FX colleagues tell us that yesterday saw some unwinding of IDR/JPY carry trade positions. Initially this morning there were more carry trades unwinding kept the IDR well offered, though BI was aggressively buying IDR at 9300 right from open, to keep IDR weakness in check. Forwards massively bid up this morning given BI's attempt to stabilise spot.
From the Ground
Repricing of risk negative, but the Indonesia story remains intact
· Repricing of risk will impact Indonesian equities
In 2009 and the early part of 2010 capital inflows were such that Indonesian bond yields fell dramatically, the currency strengthened and equities markets rallied.
With global markets in turmoil and Sri Mulyani departing, Indo bond yields and the IDR will find new equilibrium levels. In the short term, these factors will be negative for equities: Not least, the cushion to earnings and price targets that we have enjoyed of late has evaporated overnight.
Our short term fear is that we haven’t yet seen significant foreign sell orders. If and when those sell orders hit, the market can take another leg down very quickly.
· The Indonesia story remains intact
In the medium term, the Indonesia story remains very much intact: As Joshua outlines in his report ‘A Market Buying Opportunity’ (see Latest Research), Indonesia is:
· less exposed to a moderation in global economic growth (i.e. low export exposure and large domestic market)
· has loose monetary policy settings
· no need to worry about fiscal consolidation
Balance sheets are in rude health, demographics compelling and there is the potential for a sustained infrastructure cycle.
Tuesday next week, UBS is hosting a conference call (let us know if you want the invitation) with the following theme:
After Greece: Is EM the New Dollar?
Many investors are asking if the emerging currency bloc - and in particular Asia, with visibly better balance sheet and growth fundamentals - could become the new "safe haven" region, or at least the most promising source of medium-term upside against a failing G3 world.
Indonesia will have a front row seat when that scenario begins to pan out.
· Sri’s departure: Foreigners concerned, locals sanguine
Political commentator Kevin O’Rourke hosted a conference call last night on the theme ‘Indonesia Reform post Sri Mulyani’. It was a great call – let us know if you’d like the transcript or instant replay details.
In summary, Kevin was very negative. He described Sri as ‘the cabinet’s foremost reformer’ and commented that her exit is a ‘major blow to the outlook for reform’.
This is a view shared by many foreign investors. However, there is another view taking hold. After Kevin’s call, a long time Indonesia watcher emailed to say:
“Kevin is too negative. He made no comment to the effect that the Ministry of Finance has been an obstacle to progress by creating too much in the way of opposition.”
This is a view shared by many local market participants and is mirrored by the lead headline in the Jakarta Post today: Mulyani exit likely to ease tension in coalition bloc.
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