JAKARTA (TheInsiderStories) – Global investment bank, Morgan Stanley, assesses that the Indonesian stock market deserves to be looked at by global investors again after a large number of net sells occurred this year due to the COVID-19 pandemic. They also assessed that the Asian stock market outside Japan (AxJ) will enter a very friendly period in 2021.
According to the agency, during the ‘Goldilock’ period, Indonesia became one country that entered that period which benefited from the policies of the United States (US) Federal Reserves and the availability of the vaccine. The Goldilocks period is usually defined as a state of the economy that is not overheating (thus not inviting inflation), but not cold (which can lead to a recession).
Asian economist at Morgan Stanley, Deyi Tan, said the goldilocks period was a combination of accelerated growth on the tram, rising inflation and massive policy easing. In terms of banking and stock investment strategy, Indonesia’ economic growth will occur by increasing investment credit in the next first to second quarter.
“We expect the direct beneficiaries of the Omnibus Law to be property/industrial estates, technology, labor-intensive industries, such as textiles/tobacco and infrastructure. Banks will benefit indirectly as investors from this growth,” said Tan.
From a macroeconomic perspective, apart from domestic deregulation, the driver of Indonesia’ growth in the next year will be the developing digital economy and increased cooperation with China. These sentiments are considered to be able to encourage structural reforms in the country after the risk of COVID-19 has been overcome, which is expected to occur after the vaccination is carried out.
“We expect a cyclical recovery, marked by an improvement in the trend of high (trading) frequency data, along with an easing of global liquidity which is expected to trigger a market rebound amidst low foreign ownership in Indonesian stocks,” the research wrote.
Another positive sentiment on the Indonesian stock market is that the commodity market has shifted from the coal trend to nickel. Indonesia benefits from being the largest nickel producer in the world. So far, coal exports have been the main contributor to Indonesia’ growth, especially during the commodity super-cycle period in 2010 – 2013.
But unfortunately this period has experienced a slowdown, as many countries around the world pushed for a reduction in carbon use in their economies. However, nickel has the potential to drive new growth in the commodity segment.
Indonesia has the largest nickel ore reserves in the world, of the right quality for use in an EV battery. During 2014 – 2019 Indonesia’ nickel production increased 36 percent, or 32 percent of the global market share, according to Wood Mackenzie. This was driven by the accelerated investment in nickel production and smelting by PT Vale Indonesia Tbk (IDX: INCO) and PT Aneka Tambang Tbk (IDX: ANTM).
Chinese investment in nickel in Indonesia also recorded a significant increase. Tsingshan and Delong invested in the industry at the end of 2015 which increased production. Global growth of 5.1 percent was recorded in 2014 to 19.4 percent in 2019.
“We are wary of over-reliance on commodities as a driver of economic growth, with regard to the disruption caused in 2013 – 2014, in which real GDP growth slowed from more than 6 percent in the early 2010s to 5 percent since 2013. However, we think nickel will be a driving force for the commodity market in the medium term which will support Indonesia.”
In terms of the stock market, the MSCI Indonesia index year to date has fallen 26 percent, while the JCI has fallen 22 percent. This figure represents the worst performance over the year from the AxJ stock market. While, foreign net sell reached US$4.1 billion year to date, four times bigger than the full year 2019 position which was valued at $1.1 billion.
This value practically negates the net buy that has occurred since 2007. Foreign ownership of Indonesia’ major shares has simultaneously decreased by 26 point since 2017. In line with the improvement in consumption as indicated by the consumption of cement and four-wheeled vehicles and the improvement in the Purchasing Managers Index, Morgan Stanley targets the JCI to be in the position of 5,909 in June 2021.
The target is based on earnings per share of Rp426 ($0.03) in 2021 and Rp490 in 2022 with a target price to earnings ratio of 12.9 times. In addition, there are several conditions that need to be considered from these targets, such as stagnant implementation of the Omnibus Law due to incomplete derivative regulations.
Then, the government did not provide an adequate environment for the growth of domestic technology companies, especially unicorns, to dominate the market. Finally, there is an increase in geopolitical tensions between Indonesia and China in competing for Natuna waters, even though this potential has decreased since early 2020.
Morgan Stanley assessed that the opportunity for a recovery in the country’ capital market is also supported by data on domestic economic developments and the start of structural reforms. Some data that are considered to show improvement in the domestic economy are consumption data.
Led by domestic cement consumption which began to recover with a decline of only 4 percent in annual basis (YoY) in August 2020, from the previous subsidence of 11 percent in July 2020. In addition, car sales data also began to increase last August to minus 69 percent compared to minus 82 percent in July 2020.
The Consumer Confidence Index also has gradually increased to 83.4 in September 2020 from a recent low of 77.8 in May 2020.
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