STRATEGY REPORT - Market mood on the mend



September’s sell-off

The JCI dropped by 7.0% in September to 4,870  level ,  in-line with global markets that were in a sea of red led by the slump in US stocks and profit taking activities .  We believe recent market weakness is driven by domestic sentiment such as concern on i) more fiscal support from government , ii)  BI independence , iii) continued rising Covid-19 cases prompting longer strict mobility measures as well as iv) persistent net foreign selling partly due to Indonesia’s weighting reduction in MSCI Index (see Exh. 1). On global factor, upcoming US election, less dovish Fed were also contributed to the market anxiety.  Historically, September is also not a great month for the markets. The average daily trading value (ADTV) of shares traded on Indonesia bourse (IDX), which touched a peak of Rp8.13 tn in August, dropped by 16.9% in September to Rp6.76 tn. However, we believe retail investor that has been dominating daily trading did not flee the market as ADTV in September is relatively equal to average turnover in April to August period of Rp6.84 tn when market staged rally (see Exh. 2). Therefore, we believe the downtrend is likely temporary and   part of market correction and profit-taking after a strong rally.


Market remains intact

Going into 4Q20 we are still positive on the market on the basis of potential near-term catalysts such as i) better quarterly earnings in 3Q20 supported by higher earnings from banks on higher NIM and better cost of fund (see our banking sector report dated 29-Sep). Banks earnings accounts for 41% of our aggregate earnings of Rp191 tn in 2020F. We also saw volume improvement in car sales, cement and gas volume in 3Q20. ii) additional stimulus from government including tax relief for automotive sector, iii) finalization of omnibus law, and 4) news about vaccine development. At this juncture, we retain our year-end 2020 JCI target of 5,530 that would mean 13.5% upside over September’s close, but 12.2% negative return for the calendar over the December 31, 2019 close of 6,299. We still expect strong market in 4Q20 as we believe Investors will be positioning for gradual recovery growth next year and there is still liquidity that would drive upside in the coming months. Near-term risks: US election that could deliver a jolt of volatility to global markets and rising COVID-19 cases.


More stock market volatility seen ahead of election in the US

We believe global markets will be confronting elevated volatility ahead of US presidential election on 3 November.   Based on conventional wisdom, a Republican victory is deemed as more “market friendly” given the party’s association with pro-growth business policies vs. Democrat that will likely to raise taxes. We see three scenarios as most probable outcomes from the November ballot. 1) Trump wins and Republican take controls of the senate: Normally the equity markets will respond positively. 2) Biden wins and Democrat controls senate seat: market is likely to see a knee-jerk reaction and 3) Biden wins but Republicans dominate senate: stocks would also react negatively but less severe than scenario 2.  We believe the direct impact from the US presidential election to Indonesia is likely to be minimal regardless who wins from foreign affairs and trade  perspective.


Our portfolio return lower than JCI in September, still higher in 9M20

As overall market sentiment was negative in September, our top picks dropped 9.7% and underperformed JCI by 2.7%.  This was mainly due to sharp decline in banks (BMRI of -16.6%, BBRI of -13.4%) , TLKM of -10.5%, SMGR of -13.0%, and PGAS of -26.3%. We believe that they have been victim of foreign investor selling spree that  is more related to global index rebalancing move that reduce Indonesia’s weighting . Our gold producer stock MDKA declined by -7.2% largely due to gold production disturbance news following its mine incident. Our consumer picks (UNVR and ICBP) both went down by 1.5% and outperformed the JCI as  the sector is clearly defensive in nature during recessions and unfavorable market condition. On the strong side, our tower operator pick TBIG managed to increase by 2.3%  outperforming market by 9.3%.  Meanwhile, our tactical idea, BULL (tanker operator stock) rose by 5.6% outperforming the JCI by 12.6%.  As for 9M20, our portfolio gave -14.1% return vs. JCI of -22.6%, as positive return on MDKA (+48.5%) and TBIG (+11.5%) were offset by negative return of other stocks between -4.1% and -56.9%.