BI’S DECISION MEETS MARKET EXPECTATION

Toward last weekend and all through the week Rupiah and the domestic stock market was predicted to be moderate, triggered by bank Indonesia’s decision who set BI’s benchmark rate to remain at 5.75%.

               

BI’s consideration that inflation expectation and realization would still be within the corridors, i.e. 4.5% + /- 1% was responded positively by the market to invigorate spirit. This was because BI’s decision was already in accordance with market expectation so the response was positive.

               

This week Europe’s crisis virtually calmed down after the agreement to help Cyprus was arrived at. Market players tend to observe Indonesia’s fundamental economy, including the possibility of the Indonesian government adopting new policy to control subsidized oil.

The money market

               

When bank Indonesia stipulated BI to settle at 5.75%, rupiah value against USD at the inter bank forex spot market in Jakarta [11/4] surprisingly weekend by 12 points [0.123%] to       Rp9,702/ Rp9,704.

               

The condition was predicted to continue last week end when Rupiah was predicted to weaken. This would be in tandem with weakening of the Japanese yen which reached its weakest point. Indonesia and Japan were bilateral partners, therefore the process of yen weakening would trigger Rupiah weakening although not significantly.

               

Therefore Rupiah would probably weaken to the level of Rp9,730-Rp 9,750. Even if it strengthened, technically Rupiah would not be any higher than Rp9,680. – Rp 9,660.- weakening of yen started with bank of Japan who was determined to eliminate deflation by injecting boundless stimulus of 7 trillion yen per month .               

On the second day yen’s value again touched the lowest level in 4 years as traders speculated the Japan central bank [BoJ] would maintain stimulus policy to drive investors to move to other currencies of higher returns. Yen’s exchange rate value was transacted at the level of 0.2% during yesterday’s transaction and 0.1% during last Thursday’s transaction. [12/4]

               

Meanwhile USD sank against majority of leading currencies as investors speculated that central banks of the world would maintain stimulus policy. On the other side New Zealand dollar value rose to its highest level since august 2011 while Euro touched the highest level against USD in the last 6 weeks.

               

On the other hand USD inched down by 0.2% against Euro to the level of USD 1.3138, the lowest level since February 28. Euro’s exchange rate value inched up by 0.1% against yen to the level of 130.58 per yen.

               

Index of USD, as used by intercontinental exchange Inc. to track down USD value against 6 US main trade partners had touched the level of 82.068 or lowest level since March 15 ir down by 0.3% from the pre-session position of 82.257.

               

Yen’s weakening tendency might still continue and it should not be suprising that the market was willing to buy yen at high rate. The market saw some scenarios which might down press yen’s value. But on the other hand in fact with yen’s weakening, Japanese investors would sell their bonds and other yen denominated assets and change them into other currencies of stronger appeal and higher interest rate including Rupiah.

               

Supposedly a condition as such strengthened Rupiah. But Rupiah was disadvantaged by weakening of yen which supported strengthening of USD. Somehow Rupiah weakening was limited because the data released in America was predictably not so advantageous to USD. A sale of US retail was predicted to slump which did not energize USD.

               

Sales of US retail was predicted to drop to 0% of the previously published figure of 1.1%. This data had its significant impact on the market. The same was with core retail sales which was predicted to be negative to become 0.1% of the previously published 78.6%.

The chances for Rupiah appreciation still depended on the awaited speech of the fed’s Governor Ben Bernanke. It was expected that Bernanke would repeat his statement such as continued monetary stimulus and economic projection. Meanwhile in Asia, the market was still worried about the political tension in Korea. The impact could be serious if war actually broke out.

Now was the crucial moment where all that north Korea had to do was to press their ICBM button directed at South Korea especially US military bases, the Guam Island and Japan. In case of war, ASEAN stated would be injured which would paralyze Asian currencies including Rupiah.

Broadly speaking Rupiah value would still be under pressure through quarter I-2013. Bank Indonesia disclosed that pressures on Rupiah by USD was moderate considering the continued inflow of foreign capital. This was in line with BI’s policy to safeguard Rupiah exchange rate value in accordance with the fundamental economic condition whether by stepping up forex intervention, application of forex term deposit [TD] or penetration of the forex market.

Rupiah exchange rate value weakened by 0.7% on the average [q t q] to reach Rp 9.680 per USD with volatility I quarter I-2013 which was still well guarded. In the future, by considering NPI condition in quarter II-2013, pressures on Rupiah was also moderate.

BI also noted that forex reserve by end of March 2013 came to USD 104, 8 billion or equal to 5.7 months of import and installment of government’s overseas debts to be at international CAR. In line with that, meeting of BI’s board of governors decided to maintain BI rate at 5.75%. This BI rate level was rated as synchronous with inflation target of 2013 and 2014 at 4.5% + 1%

The decision to maintain BI rate was among others based on observations of some internal and external factors. In particular BI observed inflation pressures of the short term, uncertainly of economic recovery, estimated growth of Indonesia’s economy which was lower than previously estimated, and pressure on rupiah through quarter I -2013.

To observe inflation pressures of the short term and volatile food prices lately, and the ever continuing external pressures on trade balance, BI planned to enhance monetary maneuvers through absoption of higher excess of liquidity to a process of longer tenure. BI also stayed on the alert of risk from inflation and was ready to change monetary strategies as needed.

At global level, BI rated that global economic recovery was not as bright as previously predicted and was still overshadowed by uncertainty. Economic recession in Europe was still continuing due to slow implementation of austerity plan in some countries. World’s commodity prices also tend to be accommodative by maintaining low interest or quantitative easing.

At home BI saw that domestic demand was still growing well, in spite of some moderation going on, amidst improvement on the external side. The strong private consumption was thanks to people’s improved purchasing power and consumers’ trust. As for 2014, in line with the strong domestic demand and bettered global economic, economy growth was predicted to reach around 5.6% - 7.0% or lower than the previous forecast pf 6.7% - 7.2%.

On the external side, BI estimated indonesia’s balance of payment in quarter II-2013 would have increased deficit against the previous quarter in line with the bettered capital and financial transaction [TMF]. The bettered TMF was driven by inflow of portfolio investment, including global bond released by the government. However, deficit in current transaction was predicted to increase especially due to high import, among others as related to high oil consumption.

The government of RI had made transactions of state promissory notes [SUN] in foreign currency of 2013 on April 8, 2013 New York time of April 9 2013 indonesia time. This transaction of SUN in USD currency was apparently over-subscribed.

SUN series RI10423 and R10443 was sold at USD 3 billion. However, the total order book for the two series was USD 12.5 billion in which there was over-subscription of 4.2 times. This indicated that the world’s confident in Indonesia for the middle and long term remained high while the government hade taken USD 3 billion.

The SUN series of R10423 and R10433 was offered on April 8, 2013. Series R10423 for a period of 10 years was worth USD 1.5 billion consisting of coupon 3.375%, yield 3.5%, price 98,953%. This SUN would be due on April 2023. The R10423 was distributed 20% for European investors, 50% for American investors, 17% for Asia investors outside Indonesia and 13% for investors in Indonesia. The series would be distributed to asset managers 68%, bank 18%, insurance and pension insurance 11% and private banking 3%.

Meanwhile SUN of series R10443 released for a period of 30 years was worth USD 1.5 billion, with coupon level 4.625% yield 4.75%, price 98.012%. SUN of this series would be due on April 15, 2043. Seri R 10443 was distributed 56% for investors from American, 27% for investors from Europe, 13% investors from Asia [outside Indonesia] and 4% for investors in Indonesia. The series would be aimed at asset managers 81%, banks 8%, insurance and pension insurance 9% and private banking 2%.

The program was part of the global medium terms program [GMTN] or RI worth US$ 20 billion. John Lead managers and joint book runners in this transaction was deutsche bank AG, J.P. Morgan securities plc and standard chartered bank.

Acting as co-managers were PT Mandiri sekuritas and PT Danareksa and PT Danareksa sekuritas. Indonesia had the rating of BBB-[stable] form Fitch ratings, BBV + [positive] from S&P and Baa3 [stable] from moody’s. The high demand and notably low yield of global bonds indicated confidence of foreign investors in indonesia’s economic prospect for the middle and long term. Based on the above picture this week Rupiah value was predicted to be in the range of Rp9, 680 – Rp 9,700 per USD with tendency to strengthen.

The capital market

Unlike rupiah which weakened, index of IHSG and the Indonesia security exchange [BEI] settled positively at 4,924.26 after strengthening by 46.7 points or 0.9% during trading last Thursday [11.4]. Foreign investors were making net sell of Rp174.9 billion. Trade volume encompassed 5.7 billion shares worth Rp7.1 trillion. Index responded to strengthening of 167 shares, 112 stagnant shares and 110 weakening shares. Index strengthened significantly since trading of regional stock market.  The lowest level was at 4,885.79 and the highest 4, 924. 26

Highest strengthening was in the property sector up to 2.8% followed by shares in the mixed industry 1.2%. Weakening occurred only in the basic industry and mining 0.1%. Index settled at below 4,900 after down pressed below that level.

IHSG strengthening was in tandem with the course of Asian stock market led by the central bank of Japan who underscored their plan to maintain stimulus. Index of Nikkei rose by 1, 9%, index of shanghai inched down by 0.2%, index of kospi inched up by 0.7%, index of hang seng inched up by 0.7%. Meanwhile IHSG in last weekend [12/4] during closing session strengthened the limited way in the support range of 4,900 and resistance 4,980.

Index of benchmark shares in Asia was at highest level in 20 months. However, index of Japanese shares weakened as yen stopped self-downsizing against USD. Although MSCI Asia pacific inched down by 0.1% to become 138.02, the index rose by 3.4% this week. This driven by speculations that Japan would increase stimulus to uplift their economy. Besides, the signs of America’s economic recovery was giving positive sentiment.

Index of Nikkei 225 inched down by 0.4% with volume of shares transaction of 63% than the average in the past month. Index of Australian shares inched up by 0.2%. Index of kospi weakened by 0.1%. Index of New Zealand NZX inched up by 0.4%; index of Taiwan stocks inched down by 0.25%; while index of Singapore straits time rose by 0.1%; index of Shanghai inched down by 0.2%. Meanwhile, index of Singapore straits times rose by 0.1%.

Meanwhile index of shanghai stock market inched down by 0.2% during early session. Index of hang seng shares inched up by 0.3% during early session.

Shares of Wall Street once again strengthened for four consecutive days to jack up index of Dow Jones and S&P 500 to break its highest record of all time. This strengthening was supported by positive employment data and retail data of the USA. Data of employment in the USA was much less than market’s expectation, which signaled that US economy, was gaining steam. Meanwhile retail data of the USA in April was predicted to be than last march.

The shares which strengthened most were of the retail sector, like Ross stores, Victoria’ street parent L Brand Ltd and J.C. Penney Co. this retail data was closely related to employment report of last week where the result was satisfactory and jacked up shares to higher level. During closing session last Thursday [11/4] index of Dow Jones inched up by 62.90 points [0.42%] to the level of 14,865.14. Index of standard & poor’s 500 strengthened by 5.64 points [0.36%] to the level of 1.593.37. Index of composite NASDAQ rose by 2.90 points [0.09%] to the level of 3,300.16.

 The department of Manpower of the USA reported that the new claim for unemployment aid – indicator of dismissal record – came to 346,000 last week, way below analysts’ estimate of 365,000 and was steep downturn against the previous week. Pharmacy companies were having their good day with Pfizer jumping up by 2.3% and Merc rose by 0.8%. America’s automotive giants also rose: ford strengthened by 3.2% and general motors rose by 4.7%. Equity in personal computers sank, as a report disclosed that the PC computer contracted by almost 14% during first quarter against the previous year.

Hewlett-Packards sank by 6.5%, maker of Chip Intel dropped by 1.8%, and dell slumped by 1.2%, Microsoft dropped by 4.4% after their rating was lowered by Goldman sachs and Hilliard Lyons who stated that company’s success with release of windows phone wasa not too far from PC and Window operation system.

Metro PCS wireless dropped by 2.2%, submitting for the most part high increase as Deutsche Telekom T-Mobile USA increased their offer to the company. The Rite Aid Apothecary jumped up by 18.4% after reporting great up jump in their three monthly profits for the company. Ross stores jumped up by 5.9% after increasing their profit estimates because sales of some of their shops were better than expected.

 Closing of the US stock market which was positive brought good impact on Asian stock markets. IHSG moved in line with strengthening of Asian stock market. Market players took the opportunity to make buying’s amidst growing positive sentiments. Positive data form Japan and china, in combination with positive news that BI maintained their benchmark rate stimulated market players, especially local players to make notably high transactions.

All through this week IHSG had the chance to continue strengthening and would be in the range of 4,965 – 5,005 thanks to external sentiment or internal sentiment following BI’s decision to maintain BI rate at 5.75%. The only thing was that the increasing annual inflation in March 2013 at 5.9% was believed to be momentum of downturn of the shares of the banking sector and the property sector.

The property sector as part of the JAKPROP index made corrections of shares performance around 3.73% since April 1, 2013 till last Monday [8/4] whilst the banking sector included in JAKFIN made corrections of 2, 33 yet since early this year index of JAKPROP booked growth of shares performance at 37.27% while the banking sector included in JAKFIN booked growth of 18.44%.

The increase of inflation triggered worries among marketplayers over affected shares like those of the property and banking sectors. The increasing price of daily needs affected inflation level in March 2013 which influenced transactions by investors at the stock market.

Heightening inflation stimulated BI to increase benchmark rate which posed as negative sentiment to the property industry. A condition as such made investors sell property shares. In the banking sector, heightened inflation would predictably increase credit interest rate which tend to increase non-performing loan. The negative sentiment drove investors to play it safe by selling the shares and shifted their portfolio to defensive shares. At the same time, bank shares or property shares were being corrected.

Predictably the correction would only happen in a short time. As prices of essential needs were under control, investors would again take shares of the banking and property sectors. All depended on government’s policy in stabilizing prices of essential need,

The banking sector was among the sectors which constituted a significant portion in IHSG, around 24%, while the property sector constituted around 9%. Meanwhile shares of BBCA, BMRI, BDBN and BMRI were shares of highest market capitalization. Meanwhile shares of cosmetic utensils and household instrument eminent and the food & beverages sector had bright prospect all through the year compared to other sub-sectors in consumer goods sector.

Shares motion in the consumer good subsector 2013 would still be influenced by the government’s sub-sector which would increase price of oil. The average price to earning ratio of eminent of consumer good shares was 23.50 times that price to book value which was 4.05 times. BEI themselves booked index of consumer good sector which increased by year-to-date at 12.15%

In quarter two of 2013 till end of this year shares of the cosmetics and household instrument sector and F&B sub-sector would be more prospective compared to shares of other subsectors in the consumer goods index. Meanwhile shares of the cigarette industry were avoided as there were some negative sentiments which could weaken the price of shares.

Increase of provincial minimum wages [UMP] served as negative sentiment to the course of cigarette producers emitens because it was this sector which used more manpower; not to mention cigarette taxes which could be increased any moment by the government to cover up deficit from tax.

As a whole, volatility of the consumer goods sector would depend on the realization of government’s discourse to increase price of subsidized oil. If the plan was realized, there would be a short-term sentiment on emitent shares in this sector. But if oil price increase was not realized, fundamentally emitents of the consumer goods would still be able to grow between 10% - 15% again n 2013 with return on equity growing at 30% and ROI at around 25% -30%.

The only thing was that the problem of rupiah fluctuation against USD could influence the course of eminent shares of consumer’s goods. The point was that increase of rupiah value would have its influence on price of production raw materials of eminent of this sector. Investors were advised to accumulate shares which were connected with people’s consumptions level such as the F & B sub-sector.

Beside, investors could also collect eminent shares which had high market capitalization and whose fundamental performances tend to be stable. Investor’s horizons were advised to be more focused on the long term. (SS)

Business News - April 17,2013