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Jan 16, 2017 10:41:56

Bahana Bulls & Bears 2017/1: Commodities & Indonesia’s “G”
 
Strategy: Indonesia
 
A Pause in TRUMP Hype
Higher growth and inflation expectations driven by Trump “hype” has taken a breather post Dec FED rate hike. FED’s Dec’16 dot plot showing a median forecast of 3 rate hikes in 2017 seems to have reminded investors about the deflationary reality of higher US yields in the leveraged developed economies.
 
Being on the sell side, we can only note (but not yet completely quantify) a significant change in policy making between Obama and Trump. Financial (Dodd-Frank) and healthcare (Obama- care) reforms and potential regulatory changes for the energy sector can be seen as positive; while continued talks of Mexican wall and wrangling with China are negatives.
 
Overall, macro sentiment has remained positive, with global PMI surveys showing a pick-up in Global manufacturing activities. One key risk is the drop in China’s foreign reserves, leading to weaker CNY against the USD, interest rates. This reminds us of Jan’16 China Panic episode, post the first FED rate hike in Dec’15.
 
Overall, macro developments are net positive and market is awaiting details of Trumponomics before deciding on a firm medium term direction.
 
Indonesia – Commodities Resilience
The center of our bullish call on Indonesia’s cyclical recovery is the fact that commodities have bottomed, led by the oil market at USD30/brl in Feb 2016. As such, we do not expect coal to test its Jun’16 lows of USD48, CPO’s Aug’15 lows of USD480/ton etc.
 
This call has substantial implications as commodities has direct & indirect impact on Indonesia’s trade and current account, and indirectly on all GDP components such as “C”, “I”, and “G”. With oil >20% higher post Trump win (despite stronger USD and US yields), we urge investors to carefully think though commodities’ resilience in this new    market    correlation,    and its implications to investments in Indonesia.
 
Indonesia has been cautious and prudent in managing the economy, prioritizing stability over growth through 2016, evidenced by continued deficits, as well as reserve accumulation. Despite this, Indonesia showed a cyclical recovery of 5.0% GDP growth in 2016 from 4.7% in 2015.
 
We are cautiously optimistic, and continue to be long Indonesian cyclicals, while monitoring developments in Trumponomics and China reserves closely.
 

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