Market sentiment: a yo-yo year

The Indonesian equity market went on a mini bull run at the beginning of 2018, starting the year with the JCI at 6,356 before quickly climbing to its new all-time high of 6,689 on 19 Feb 2018. It plunged to the 2018 low of 5,634 in Jul 18 as concerns over the country’s persistent twin deficit was exacerbated by a loose monetary policy despite a rising FFR and growth risk from the impact of talk of an intensifying trade war between the US and China. A period of rapidly rising oil price (to 2018 peak level of US$86/bbl but it has since fallen to less than US$60/bbl) added to the fears.

The change in monetary policy to prioritise stability over growth, whichwas followed through by rapid rate hikes that totalled 175bp within 6 months,helped to hold the currency steady. Robust tax receipts, which could cut thestate budget deficit from 2.2% of GDP to the 1.8-1.92% range, catalysed thebond rally. Talks of a pause on FFR hikes possibly helped as well. The JCIjoined the rally, rebounding to 5,948 by 21 Nov. Meanwhile, the small-capstocks outperformed the big-cap stocks, judging by the fact the wider JCIoutperformed the LQ45 index by 6%. This was perhaps due to lower foreignexposure to the smaller stocks, although the widening valuation gap as earningsrebounded suggests that the smaller stocks are indeed attractive

Up until 21 Nov 2018, coal,auto, cement and bank stocks outperformed the index while toll road, media andconstruction sectors were the worst underperformers. Given the concerns overweaker Rp, US$ earners (i.e. coal, industrial goods & services) faredbetter. The cement sector outperformed, boosted by declining coal prices andnews on consolidation within the sector (as the third-largest company bycapacity sold itself to the largest)

Three factors swayed sentiment: FFR uncertainty, oil price surge andsubsequent Rp volatility, which pushed up the swap cost sharply. JCI mostlyunderperformed the bond market, with total returns (including dividends) of -4%up until 21 Nov 2018 below the 10-year bond’s total returns by -2.8%, much likein 2008/2013/2015, when risk aversion was high.

The aggregate earnings growth forecast, meanwhile, was pared down forFY18F from 14% yoy at the beginning of the year to 7% yoy by Nov 18. The FY19Fearnings growth forecast, however, ended up higher at 14% as of Nov 18 vs. 12%yoy as of Dec 17 as 2019 earnings were relatively unadjusted (in absolute Rpterms). Much of the downgrade in the FY18 earnings forecast was due toweaker-than-expected earnings in 2Q18, which was, in turn, due to generally slower-than-expected topline growth. The downgrades were also influenced by concerns over the impact of weaker currency (whereas Rp depreciated by 13% from2018 peak-to-bottom) and higher interest rates (up by 175bp YTD as of  Nov 18).

Going into 4Q18, the macro and corporate earnings data suggest thatearnings growth is pretty resilient as consumption, both private and public(5.0% yoy and 6.3% yoy growth in 3Q18, respectively), as well as gross fixedcapital formation (GFCF; +7.0% yoy) propped up GDP growth to 5.2% yoy whileaggregate corporate earnings climbed 12.5% yoy in 3Q18.

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