USD is not as weak as its peers; Trading opportunity in Indonesia equities

The USD is gaining ground despite lower yields. We see opportunities in Indonesia equities.
Philip Wee, Joanne Goh31 May 2019
    Photo credit: AFP Photo

    FX: USD is not as weak as its peers

    The US dollar has been standing its ground against lower US bond yields. The Federal Reserve will, at its FOMC meeting on June 19, acknowledge global growth risks from a re-escalation in trade tensions. The Fed, however, will not subscribe to the recession risks implied by the inverted US yield curve. To resist calls for rate cuts, the Fed has been making the case to safeguard financial stability from record high stock markets and corporate debt levels. The Fed’s economic projections will probably reflect modest growth downgrades that keep rates stable for longer.


    The euro is drifting lower towards 1.10 vs the USD. The European Central Bank governing council will maintain a dovish forward guidance at its meeting on June 6. The ECB staff forecast for 2019 growth, which was last downgraded in March to 1.1% from 1.7%, will need to account for escalating trade tensions, a slowing Chinese economy, increased odds for a disorderly Brexit and a potential EU-US tariff war ahead. Not surprisingly, the euro has not been able to fend off the depreciation pressures from an increasingly negative EU bond yield that has fallen below its Japanese counterpart.

    Equities: Trading opportunity in Indonesia
    We remain positive on Indonesia as we believe the equity market should rebound once the dust settles, led by confidence placed in Bank Indonesia (BI) and strengthening in the rupiah. As in last year, we see BI navigating the economy through the dark clouds. Hope of rate cuts in Indonesia could diminish, and we don’t expect BI to hike rates aggressively like last year even if rupiah volatility rises.
    In Indonesia, we have to monitor the RMB for downside risks as the weak sentiment in the currency market could drive outflows in Indonesia bonds and equities, spiralling into a vicious downward cycle. However, we believe value has started to emerge in these two asset classes  and there should be good support from a valuation standpoint. The Indonesia equity market  is now trading at 13.9x 12-month forward PE, which is below historical average valuations, and is the second cheapest market in ASEAN after Singapore. Likewise, DBS fixed income strategist thinks that Indonesia government bonds are the most undervalued among their regional peers. So far, rupiah has stabilised at around USD/IDR 14,300-14,500 and its foreign reserves, at USD124bn, is seen as strong enough to defend the rupiah if need be. 
    Near-term upside for the market could be limited as the trade war drags on, but we see strong opportunity if there is a sell-off. To us, JCI at below 6000, USD/IDR at above 15000, and 10-year bond yields at above 8.5% will be a strong BUY for the market, as evidenced by past strong market rebounds.

    Philip Wee

    FX Strategist - G3 & Asia

    Joanne Goh

    Regional Equity Strategist

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