India assets awaiting election outcome; Indo govvies look undervalued
Indonesia govvies appear to be bearing the brunt of collateral damage from the escalation in China-US trade tensions. Since the start of April, 10Y yields have risen by close to 50bps to 8.10% as USD strength becomes ascendant. It is probably no coincidence that foreign ownership started to ease over the same period. Demand for Indo govvies is still lacklustre with the recent round of auctions drawing just IDR 26tn worth of bids (of which ISD 10.8tn is accepted). With the 3M USD/IDR NDF forward points still elevated (likely on the back of post-election uncertainties), foreign investors are likely to stay on the side lines for now.
That said, our Asia Rates Valuation Indicator (ARVI) suggests that Indo govvies are the most undervalued (by a significant margin) compared to peers. The last time Indonesia displayed this level of relative undervaluation was during the height of the emerging market selloff in 3Q18. Notably, real rates are high and Bank Indonesia has thus far been on the cautious side (refraining from joining India, Philippines and Malaysia in easing monetary policy) as the USD/IDR drifts higher. In the current challenging external backdrop, rate cuts are probably not in the offing just yet.
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