Beyond Uncertainty

The year 2016 is about to close its door, and have left many scars in the economic and political arena around the world – nonetheless – Indonesia. The spotlight for the next two months is in the US, with the presidential election on the 8^th of November, and the Federal Reserve announcement on the Fed Fund Rate on the 15^th of December. The consensus have been leaning towards a higher rate on December, with 36.7% predicted that it will be raise by 0.5-0.75 bps. Eyeballing the macro data from the US recently, there is certainly a high probability that the fed will raise the rate – despite the higher jobless claims and lower consumer confidence in October. On another note, the political field in the US is definitely an odd one where most young Americans are deciding not to vote on this year presidential election [link]. 

Enough with the US, back home in Indonesia, the central bank (Bank Indonesia) just cut the benchmark rate 7 day reverse repo on 20^th of October by 0.25 bps from 5% to 4.75% in order to fulfill 2016’s GDP of 5.1% and inflation target of 4%. Indonesian Central Bank (BI) is predicting that the Fed will increase the interest rate in December; hence they didn’t wait for the Fed to drop down the benchmark rate. Besides achieving GDP and inflation in 2016, despite the fact that most state banks in Indonesia are currently struggle with bad loans [link], BI also hoping that the cut will affect the average lending rate of 14.13 to be lower to push the credit lending growth. 

The effect of the lower benchmark rate is definitely a higher price of bonds, which decreases its yield and investors who owns them will start to clamor “SELL!!” Unlike in the US, the lower rate did not necessarily take effect in the stock market; the Jakarta Composite Index (JCI) was relatively flat during the announcement and the following day. The flat movement of the index is due to the net sell of foreign investors from the market and on top of that, the Rupiah (IDR) depreciates by 0.31% a day after the announcement. The Tax Amnesty program held by the Indonesian government has helped the IDR appreciate up to below 13,000 per USD on the last week of September and kept the momentum for about two weeks. 

As the Indonesian government is trying to boost domestic demand and increase export, on the currency side is not cooperating enough because the IDR is appreciating – which can cut demand because international buyer will get less for what they pay for; and not only the USD that depreciate against IDR, but the Euro (EUR) also depreciates 8.54% from June position of 15,475 per EUR. And none the less, the British Pound sterling, it dropped 8.03% against IDR in one day during the Brexit result back in June, and toppled another 13.26% in October. There’s a probability of another rate cut before the yearend due to the currency effect and Jokowi’s ambition of 7% economic growth by 2017 and 

The JCI will be very mix in the next two months, especially in December. The probability of US presidential election may perhaps be positive if Hillary wins – despite her scandals, and the impact on Indonesian market will be negative because investors will be pitching in to the US market (we all know that Hillary is PRO – Wall Street). With a high probability that the Fed will increase rate, there’s room for BI to make another cut on the benchmark rate in order to keep the IDR competitive in the market. Aside from the US election and monetary effect, the JCI may increase by the end of December due to the window dressing of most companies for end of year and quarterly earnings.

One fund management in Indonesia mentioned that there would not be a significant outflow of liquidity in the bond market because investors have expected and anticipated the rate increase since the beginning of the year, thus they concluded that the market in the emerging market will be stable, especially in Indonesia with the probability of a lower benchmark rate from BI by yearend. 

Fixed income fund and money market fund may give you a good night sleep during the market turbulence in the next two months; also, consider infrastructure companies and consumer goods companies such as Matahari department store and Ramayana, these stocks have high probability to rise in January due to the window dressing and pushing their revenue for the 2016-year end due to the window dressing effect to close 2016 revenue. For mutual fund approach, big caps mutual fund can be beneficial and may receive the overflow from the window dressing effect. Mixed fund can be put into consideration as well because of most of mixed fund have big cap stocks and a good portion government bonds.