A very normal part of the semiconductor cycle is inventory clearance. DRAM makers are starting to discuss this in their earnings calls. What they are NOT telling their investors is how significant this is to the onset of a price collapse, perhaps because they don’t understand it themselves. This Insight will help readers to learn how and why an inventory clearance helps ratchet a budding oversupply into a full-blown glut.
INVESTMENT VIEW: The Australian Bureau of Meteorology has just downgraded its risk of El Niño from ‘Alert’ to ‘Watch’, and as a result, we temper our optimism for a near-term rally in CPO prices. Longer-term, we remain bullish on Golden Agri Resources (GGR SP), but higher CPO prices remain a key catalyst for our bullish call on the shares.
We opine that Jokowi (incumbent President) is the best performer/debater in terms of public speaking and argument skills during the first Indo presidential debate.
What stands out to us is the display of stark personality differences between Jokowi (humble, down to earth) and Prabowo (hard-nosed, tough minded).
The debate improves Jokowi’s likelihood of getting re-elected (a positive catalyst to Indo stock market), in our opinion.
The dramatic defeat of PM May’s Brexit arrangement with the EU was seen by the markets as a positive development. Apparently the markets believe that this could result in Britain remaining in the EU.
While we agree this would be good news we consider it unlikely without many more months or years of uncertainty as another referendum is organized and implemented.
Romania: GDP in Q3 grew 4.4% y/y, up from 4.1% in Q2. The country’s economy is doing better than most EU countries. Brazil: The CPI in Dec rose 3.7%, down from 4.05% in Nov. Lowest rate since May, as prices slowed for food and fuel. India: The trade deficit in Dec narrowed to $13.1 bn. Exports rose a meager 0.3% and imports fell 2.44%. GDP growth of 7% is expected for this year and next..
The globe is facing more than an ordinary business cycle.
Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.
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BI held its benchmark rate steady due to current account concerns; in any event, bank credit growth suggests that the economy has considerable momentum despite international headwinds and the 2018 rate hikes. Widodo did enough to surpass Prabowo in the 1st of 5 presidential debates, although Prabowo avoided gaffes and both candidates lacked energy. Dubbed a ‘dud’ in headlines, it at least featured constructive discussion of bureaucratic reform. Widodo also promised a National Legislative Center to rectify conflicting and excessive regulation. A Charta Politik poll shows steady margins for Widodo and PDI-P as of late December and the sole reform-minded party, the new PSI, finally registered support of 1.5%. Planners remain at odds over a location for a downtown terminus of Jakarta’s elevated LRT — a project crucial for complementing the imminent MRT.
Politics: Despite a critical domestic press reaction and a lack of sensational moments, the first presidential debate produced the most detailed high‑level discussion of bureaucratic reform in more than a decade. Overall, President Joko Widodo fared better than his challenger, Gerindra Chair Prabowo Subianto, but both seemed lacking in energy. Both also succeeded in avoiding pitfalls: Widodo’s running mate, the aging cleric Mar’uf Amin, caused no major embarrassment for the ticket; and Prabowo maintained an even temper with no unseemly rants. The candidates traded barbs: Prabowo hit home by questioning Widodo’s decision to appoint a “top law enforcement official” (i.e., the attorney general) who is a party representative; and Widodo twice inflicted damage by citing Gerindra’s lack of women in its leadership and its nomination of corruption convicts for legislative offices. Widodo unveiled a plan for a National Legislative Center (Puslegnas). The debate, translated in full by Ref Wkly, seems unlikely to alter the candidates’ poll positions (Page 2). The president approved the release of the 80‑year‑old icon of terrorist groups, Abu Bakar Basyir (p. 15). Widodo visited a fair for businesses run by impoverished households and, oddly, purchased 100,000 1‑liter bottles of dishsoap from one vendor. At best, the episode may indicate a preoccupation with his family’s catering business; at worst, it shows haphazard handling of his personal finances (p. 16).
Surveys: Charta Politik measured President Joko Widodo’s margin as being virtually unchanged at 19 percentage points in late December. It also confirmed that PDI‑P’s nomination of Widodo is a major reason for its popular support. The pro‑reform Solidarity Party (PSI) finally registered detectable support of 1.5 percent (p. 17).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Infrastructure: Differences between the central and provincial government persist over where to locate the terminus of the Light Rail Train (LRT) in downtown Jakarta. A large land plot south of Landmark Tower has been vacant for decades – but the central government prefers a less central location (p. 19).
Economics: The rupiah has partially rebounded amid easier external financing conditions in recent weeks, but Bank Indonesia (BI) nonetheless decided this week to maintain its benchmark rate at 6.0 percent – due to a persistently high current account deficit. In part, the deficit reflects Indonesia’s considerable economic momentum. Nonetheless, rising fuel imports and falling oil production signal continued current account pressure ahead, necessitating vigilance from BI (p. 20).
Trawling through >1500 global banks, based on the last quarter of reported Balance Sheets, we apply the discipline of the PH Score™ , a value-quality fundamental momentum screen, plus a low RSI screen, and a low Franchise Valuation (FV) screen to deliver our latest rankings for global banks.
While not all of top decile 1 scores are a buy – some are value traps while others maybe somewhat small and obscure and traded sparsely- the bottom decile names should awaken caution. We would be hard pressed to recommend some of the more popular and fashionable names from the bottom decile. Names such as ICICI Bank Ltd (ICICIBC IN) , Credicorp of Peru, Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB US) are EM favourites. Their share prices have performed well for an extended period and thus carry valuation risk. They represent pricey quality in some cases. They are not priced for disappointment but rather for hope. Are the constituents of the bottom decile not fertile grounds for short sellers?
Why pay top dollar for a bank franchise given risks related to domestic (let alone global) politics and the economy? Some investors and analysts have expressed “inspiration” for developments in Brazil and Argentina. But Brazilian bonds are now trading as if the country is Investment Grade again. (This is relevant for banks especially). Guedes and co. may deliver on pension/social security reform. If so, prices will become even more inflated. But what happens if they don’t deliver on reform? Why pay top dollar for hope given the ramp up in prices already? Argentina is an even more fragile “hope narrative”. More of a “Hope take 2”. Similar to Brazil, bank Franchise Valuations are elevated. While the current account adjustment and easing inflation are to be expected, the political and social scene will be a challenge. LATAM seems to be “hot” again with investment bankers talking of resilience. But resilience is different from valuation. Banks from Chile, Peru, and Colombia feature in the bottom decile too. If an investor wants to be in these markets and desires bank exposure, surely it makes sense to look for the best value on offer. Grupo Aval Acciones y Valores (AVAL CB) may represent one such opportunity.
Our bottom decile rankings feature a great deal of banks from Indonesia. In a promising market such as Indonesia, given bank valuations, one needs to tread extremely carefully to not end up paying over the odds, to not pay for extrapolation. In addition, India is a susceptible jurisdiction for any bank operating there – no bank is “superhuman” and especially not at the prices on offer for the popular private sector “winners”. Saudi Arabia is another market that suddenly became popular last year. We are mindful of valuations and FX.
Does it not make more sense to look at opportunity in the top decile? While some of the names here will be too small or illiquid (mea culpa), there are genuine portfolio candidates. South Korea stands out in the rankings. Woori Bank (WF US) is top of the rankings after a share price plunge related to a stock overhang but this will pass. Hana Financial (086790 KS) , Industrial Bank of Korea (IBK LX) and DGB Financial Group (139130 KS) are portfolio candidates. Elsewhere, Russia and Vietnam rightly feature while Sri Lanka and Pakistan contribute some names despite very real political and macro risks. We would caution on some of the relatively small Chinese names but recommend the big 4 versus EM peers – they are not expensive. In fact some of the big 4 feature in decile 2 of our rankings. There are many Japanese banks here too. And many, like some Chinese lenders, are cheap for a reason. While the technical picture for Japanese banks is bearish, at some stage selective weeding out of opportunity within Japan’s banking sector may be rewarding. The megabanks are certainly not dear. Europe is another matter. Despite valuations, we are cautious on French lenders and on German consolidation narratives – did a merger of 2 weak banks ever deliver shareholder value? The inclusion of two Romanian banks in the top decile is somewhat of a headscratcher. These are perfectly investable opportunities but share prices have been poor of late.
Leading Indonesian mini-mart operator Sumber Alfaria Trijaya Tbk P (AMRT IJ) (Alfamart) has undergone quite a dramatic transformation over the past 12 months, with a dramatic slowdown in its new store buildout paving the way for a significant pick up in SSSG and a reduction in debt.
The company plans to start to step up its store openings selectively over the next year, with 500 new stores planned and fewer closures. Last year it only opened net 200 new stores having opened 1200 stores the previous year.
The market segment continues to see consolidation, with supermarkets and hypermarts suffering and mini-markets continuing to gain ground as the “pantry of the middle-class”.
The company continues to grow its fee-income business, which is highly profitable, with increasing collaboration with utilities, finance companies, and e-commerce players to name but a few.
After a difficult 2017, Sumber Alfaria Trijaya Tbk P (AMRT IJ) looks to be well and truly back on a growth trajectory, with a rationalisation of its stores, a slow down in its expansion, reduced gearing, and a focus on operational efficiencies. The Mini-market continues to win out in the retail space and is increasingly being used as a distribution network for e-commerce companies. The growth in fee-service from bill payment and other services will be positive for the bottom line. The stock is by no means cheap on a PE basis but provides quite unique exposure to what is still a high-growth area of the economy. According to Capital IQ consensus estimates, the company trades on 51x FY19E PER and 44x FY20E PER, with forecast EPS growth of +30% and +16% for FY19E and FY20E respectively.
Uzbekistan’s economy is a frontier market stand out and has a large number of attractive characteristics:
Uzbekistan’s stock market trades at a substantial discount to other frontier markets, though the extremely illiquid nature of the market makes it hard to trade. However, there still is foreign interest in the market.
The IMF projects that the economy will grow by 5% during 2018 and 2019, and eventually reach 6% by 2022, though this is still below its historical high.
Market reforms were spearheaded in December 2016 when the newly elected president, Shavkat Mirziyoyev decided to transition towards a market- oriented economy led by private sector growth, as the public sector was unable to create enough jobs. This represents a significant shift given that Uzbekistan had been a closed, centrally planned economy until 2016.
Tourist arrivals grew by 91.6% during H1 2018, and this is poised to improve greater in the future due to the impact of the visa liberalization measures.
Twin deficits have remained under control and Uzbekistan is one of few current account surplus frontier markets.
Uzbekistan is also very attractive compared to other markets in the frontier space given that its minimum wage is only US$24/month, compared to around $70-75/month in Kyrgyzstan and Kazakhstan.
The market reforms that the country recently implemented will be a major catalyst for future economic growth and makes investment in this market appealing. Apart from strong growth, the market is also appealing due to its high foreign exchange reserves ( nearly 2 years of import cover), consistent CA surplus, and stable currency. My latest frontier and emerging market recap highlights the appeals of markets such as Bangladesh, Vietnam, and Egypt, while expressing concerns for markets such as Sri Lanka and Pakistan. Uzbekistan is a suitable addition given its stable macro/political picture, and the main negative factor of this market is the highly inaccessible nature of the equity market. The ADTV is less than $100,000, which is a far cry from other frontier markets like Romania, Sri Lanka and Kenya.
Highlights of significant recent happenings include:
Substantive Deep Dive – Canada’s BlackBerry Ltd (BB CN) seeks to be the go-to provider of web Security: Why we believe investors should look at Blackberry as a way to hedge their exposures to the increasing list of companies who are susceptible to adverse impact from security breaches.
Feeding the Dragon – Chinese buying of US firms brakes abruptly, obliterating the long-term trend, and now Japan has become the second-largest market for outbound M&A globally. Also, South Korean food giant Cj Cheiljedang (097950 KS) is continuing its aggressive expansion into the U.S. market
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Wars in old times were made to get slaves. The modern implement of imposing slavery is debt. Ezra Pound
Governments used public sector balance sheets to bail out private financial institutions and assist private companies to emerge from bankruptcy in the GFC. These actions transferred credit risk from the private to the public sector, yet falling nominal interest rates minimised, and in some cases froze, the cost of servicing the mounting government debt until late 2016. Since then, many borrowers have paid rising interest rates on increasing amounts of debt. Debt service charges are rising faster than nominal GDP in a growing number of nations as a result. It is estimated that the US federal funding requirement will rise from minus US$ 700bn to US$ 2tr in 2022.
Looking at the telco space for Emerging Asean markets in 2019, we see a number of key themes.
Revenue trends are likely to worsen in Thailand and the Philippines, but improve in Indonesia and possibly Malaysia.
Margin trends usually follow revenue but Indonesia will have the added benefit of reduced subscriber churn following the SIM registration completion in 2018.
Political risk is elevated with elections in Thailand (although renewed talk of delays) and Indonesia.
Overall, Indonesia looks to be the most interesting market with rising revenue growth as the market stabilizes. Telekom Indonesia (TLKM IJ) is our top pick, followed by Xl Axiata (EXCL IJ). Elsewhere, Malaysia looks to be improving but valuations remain high. The outlook has worsened in Thailand with DTAC (DTAC TB) getting hold of spectrum and now litigation risk coming to the fore with old cases with TOT/CAT. The Philippine duopoly faces the rude shock from the China Telecom Consortium’s entry in late 2019.
Monetary diarrhoea has inflated the debt structure.
The death of the Bretton Woods monetary system in 1971 paved the way for unbridled money printing. The resulting Great Inflation inflicted huge negative real returns on bondholders and stockholders until 1982. Thereafter, many countries, especially EMs, linked their exchange rates to the dollar, resulting in the fastest ever-growth in global foreign exchange reserves. In addition, central bank puts and then extraordinary fiscal and monetary policies turned it into the most virulent asset bubble in history, despite monetary mayhem, exemplified by numerous banking crises and three big stock market drawdowns.
Credit demand is deteriorating; credit risks are rising; Eurodollar costs are edging higher
A de-escalation in trade tensions and a Fed pause could ease the pain
Will Fed recently turning more dovish (possible shift to slower QT & Fed rate cut in 2019?) + concomitant USD drift provide sufficient respite to put a floor under risk assets?
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On the back of a growing LNG global trade volume, LNG producers have outperformed the US market and their E&P peers including the oil majors over the last two years. As global LNG production reaches a record 316m tonnes in 2018, a 9.6% increase year on year, new capacity additions set to come online in the next three years will be dominated by the US. This insight will examine how the recent entry of US LNG in the market is transforming the LNG industry and which emerging players are driving the change.
Exhibit 1: LNG Producers Outperform the US Market
Source: Capital IQ. Prices as of 22 of January. Un-weighted indexed composites. Oil Majors: Exxon, Chevron, Shell, BP, Total and ENI. Australia LNG: Woodside Energy, Santos, Oil Search. independent E&Ps: oil and gas upstream companies with market value greater than $300m as of 18 April 2018.
2018 was a year to forget for many active GEM managers. Absolute returns were the worst since 2011 and, relative to the I-Shares MSCI Emerging Markets ETF, active funds registered their first average underperformance since 2008. Here we share some of the key data points on active fund performance for 2018 and over the longer term.
There is a certain scenario in which the Indonesian market in 2019 could outperform on relative basis. If global growth slows while the resilient household sector holds up, capital inflows coud prove sufficient to cover the current account and avert yet more depreciation.
An adverse policy framework is depressing key sectors and hampering investment – at a time when the current account deficit (Cad) is jeopardizing stability. The administration of President Joko Widodo, who is cruising to re-election, shows little urgency about rectifying recent declines in Foreign Direct Investment (FDI). These concerns have underpinned our bearish outlook for the market in 2019 (see Indonesia: The Year of Dithering Dangerously). But in the event of a sharp global slowdown this year, Indonesia has potential – on a relative basis – to outperform.
Indonesia’s economy is poorly integrated with the international arena, and this ‘decoupling’ can offer insulation from global turbulence under certain conditions. And the key driver of GDP is household consumption, which has shown resiliency by sustaining a 4.9‑5.1 percent pace of annual growth over the past five years. As global growth deteriorates, Indonesia’s stalwart consumer‑growth engine may stand out and garner attention; if so, this may attract the capital inflows needed to cover the Cad.
However, risks remain high due to a background context that features policy flaws and institutional dysfunctions. Reforms to address the investment climate could bring about a substantial upward re‑rating – but prospects for Widodo to move assertively in this direction seem poor. In the continued absence of meaningful reforms, macro-economic stability will remain fragile, vulnerable to abrupt reversals in short‑term portfolio flows. Given Indonesia’s weak export performance and growing dependence on imported oil, the currency would face renewed pressure in the event of excessive Federal Reserve hikes or global shocks. However, in a scenario of global deceleration without undue turbulence, Indonesia has potential to outperform.
A very normal part of the semiconductor cycle is inventory clearance. DRAM makers are starting to discuss this in their earnings calls. What they are NOT telling their investors is how significant this is to the onset of a price collapse, perhaps because they don’t understand it themselves. This Insight will help readers to learn how and why an inventory clearance helps ratchet a budding oversupply into a full-blown glut.
INVESTMENT VIEW: The Australian Bureau of Meteorology has just downgraded its risk of El Niño from ‘Alert’ to ‘Watch’, and as a result, we temper our optimism for a near-term rally in CPO prices. Longer-term, we remain bullish on Golden Agri Resources (GGR SP), but higher CPO prices remain a key catalyst for our bullish call on the shares.
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We opine that Jokowi (incumbent President) is the best performer/debater in terms of public speaking and argument skills during the first Indo presidential debate.
What stands out to us is the display of stark personality differences between Jokowi (humble, down to earth) and Prabowo (hard-nosed, tough minded).
The debate improves Jokowi’s likelihood of getting re-elected (a positive catalyst to Indo stock market), in our opinion.
The dramatic defeat of PM May’s Brexit arrangement with the EU was seen by the markets as a positive development. Apparently the markets believe that this could result in Britain remaining in the EU.
While we agree this would be good news we consider it unlikely without many more months or years of uncertainty as another referendum is organized and implemented.
Romania: GDP in Q3 grew 4.4% y/y, up from 4.1% in Q2. The country’s economy is doing better than most EU countries. Brazil: The CPI in Dec rose 3.7%, down from 4.05% in Nov. Lowest rate since May, as prices slowed for food and fuel. India: The trade deficit in Dec narrowed to $13.1 bn. Exports rose a meager 0.3% and imports fell 2.44%. GDP growth of 7% is expected for this year and next..
The globe is facing more than an ordinary business cycle.
Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.
MUFG initially bought 19.9 percent of Bank Danamon from Singapore state investor Temasek Holdings 15.875 trillion rupiah ($1.17 billion), then valuing the Indonesian lender at around $6 billion.
Step 2 saw the OJK give the OK (BDMN announcement in English) for MUFG to up its holding to 40% – the statutory maximum under the prevailing OJK regulation No.56/POJK 03/2016 – and the Indonesian Financial Services Authority (OJK), seemingly granted permission for MUFG to go above 40% in Bank Danamon when OJK deputy commissioner for banking, Heru Kristyana, wrote in a message to a Reuters journalist (article here) on August 3rd last year “They (MUFG) can have a larger stake than 40 percent once the merger (with Bank Nusantara) has gone through and as long as they meet provisions and requirements.”
As Johannes Salim, CFA pointed out in his interesting insight Bank Danamon: Fundamentals Revisited Plus Thoughts on M&A in March last year, the revised OJK regulation No.56/POJK 03/2016 placed the authority for determining whether or not a foreign acquiror could go above 40% squarely on the OJK – no BI approval would be necessary.
Indonesia has a “Single Presence Policy” (OJK Regulation No. 39/2017) which requires that a foreign owner may not hold more than one control stake in a bank. In order to get to Step 3 which would be to acquire the remaining 33.8% of Danamon from Temasek affiliates (Asia Financial Indonesia and its affiliates), MUFG would need to merge its presence in Bank Nusantara Parahyangan (BBNP IJ) (also known as “BNP”) where it holds more than three-quarters of the shares (and has controlled since 2007) with Danamon.
The New News
This morning’s paper carried a giant notice in bahasa announcing the planned merger between BDMN and BNP with shareholder vote for both banks 26 March 2019 (record date 1 March) and effective date 1 May 2019. The Boards of Directors and Boards of Commissioners of each bank
“view that this Merger will increase the value of the company because it is a positive move for stakeholders, including the shareholders of Bank Danamon,” and
“have proposed to their shareholders to agree with the resolution on the proposed Merger in each of their respective GMS.”
Indonesian takeover procedures generally require a Mandatory Takeover Offer procedure when someone goes over a 50% holding. But banks being bought by foreigners are a different category and bank takeovers are regulated by the OJK. In addition, the structure of such takeovers creates short-term options (for holders) and possibly longer-term obligations for the acquiror which are a little unusual, but provide for a very interesting opportunity in this case.
This week’s offering of Insights across ASEAN@Smartkarmais filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up pieces. Please find a brief summary below, with a fuller write up in the detailed section.
In Singapore Real Deals (Jan 2019 Issue 1, Anni Kum launches a new regular product commenting on significant developments in the Singapore property sector. Singapore Real Deals is a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In the first issue of Singapore Real Deals, she will dive into the first property launch in Prime District 9 in 2019, RV Altitude, to get a sense of the product mix and pricing strategies that developers are adopting in a price-sensitive market.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Looking at the telco space for Emerging Asean markets in 2019, we see a number of key themes.
Revenue trends are likely to worsen in Thailand and the Philippines, but improve in Indonesia and possibly Malaysia.
Margin trends usually follow revenue but Indonesia will have the added benefit of reduced subscriber churn following the SIM registration completion in 2018.
Political risk is elevated with elections in Thailand (although renewed talk of delays) and Indonesia.
Overall, Indonesia looks to be the most interesting market with rising revenue growth as the market stabilizes. Telekom Indonesia (TLKM IJ) is our top pick, followed by Xl Axiata (EXCL IJ). Elsewhere, Malaysia looks to be improving but valuations remain high. The outlook has worsened in Thailand with DTAC (DTAC TB) getting hold of spectrum and now litigation risk coming to the fore with old cases with TOT/CAT. The Philippine duopoly faces the rude shock from the China Telecom Consortium’s entry in late 2019.
Monetary diarrhoea has inflated the debt structure.
The death of the Bretton Woods monetary system in 1971 paved the way for unbridled money printing. The resulting Great Inflation inflicted huge negative real returns on bondholders and stockholders until 1982. Thereafter, many countries, especially EMs, linked their exchange rates to the dollar, resulting in the fastest ever-growth in global foreign exchange reserves. In addition, central bank puts and then extraordinary fiscal and monetary policies turned it into the most virulent asset bubble in history, despite monetary mayhem, exemplified by numerous banking crises and three big stock market drawdowns.
Credit demand is deteriorating; credit risks are rising; Eurodollar costs are edging higher
A de-escalation in trade tensions and a Fed pause could ease the pain
Will Fed recently turning more dovish (possible shift to slower QT & Fed rate cut in 2019?) + concomitant USD drift provide sufficient respite to put a floor under risk assets?
We noted in Ten Years On – Asia Outperforms Advanced Economies Asia’s economies and companies have outperformed advanced country peers in the ten years to 2017. Growing by 6.8%, real, through the crisis the region is 188% larger in US dollar terms while US dollar per capita incomes 170% higher compared with 2007. In this note we argue even though Asian stock markets have underperformed since 2010 and the bulk of global capital flows have gone to advanced countries, Asia’s time is coming. Valuations are cheap. Growth fundamentals strong. There are few external or internal imbalances. Macroeconomic management has been better than in advanced economies and the scope to ease policy to ward off headwinds in 2019 is greater. China has already started.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The dramatic defeat of PM May’s Brexit arrangement with the EU was seen by the markets as a positive development. Apparently the markets believe that this could result in Britain remaining in the EU.
While we agree this would be good news we consider it unlikely without many more months or years of uncertainty as another referendum is organized and implemented.
Romania: GDP in Q3 grew 4.4% y/y, up from 4.1% in Q2. The country’s economy is doing better than most EU countries. Brazil: The CPI in Dec rose 3.7%, down from 4.05% in Nov. Lowest rate since May, as prices slowed for food and fuel. India: The trade deficit in Dec narrowed to $13.1 bn. Exports rose a meager 0.3% and imports fell 2.44%. GDP growth of 7% is expected for this year and next..
The globe is facing more than an ordinary business cycle.
Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.
MUFG initially bought 19.9 percent of Bank Danamon from Singapore state investor Temasek Holdings 15.875 trillion rupiah ($1.17 billion), then valuing the Indonesian lender at around $6 billion.
Step 2 saw the OJK give the OK (BDMN announcement in English) for MUFG to up its holding to 40% – the statutory maximum under the prevailing OJK regulation No.56/POJK 03/2016 – and the Indonesian Financial Services Authority (OJK), seemingly granted permission for MUFG to go above 40% in Bank Danamon when OJK deputy commissioner for banking, Heru Kristyana, wrote in a message to a Reuters journalist (article here) on August 3rd last year “They (MUFG) can have a larger stake than 40 percent once the merger (with Bank Nusantara) has gone through and as long as they meet provisions and requirements.”
As Johannes Salim, CFA pointed out in his interesting insight Bank Danamon: Fundamentals Revisited Plus Thoughts on M&A in March last year, the revised OJK regulation No.56/POJK 03/2016 placed the authority for determining whether or not a foreign acquiror could go above 40% squarely on the OJK – no BI approval would be necessary.
Indonesia has a “Single Presence Policy” (OJK Regulation No. 39/2017) which requires that a foreign owner may not hold more than one control stake in a bank. In order to get to Step 3 which would be to acquire the remaining 33.8% of Danamon from Temasek affiliates (Asia Financial Indonesia and its affiliates), MUFG would need to merge its presence in Bank Nusantara Parahyangan (BBNP IJ) (also known as “BNP”) where it holds more than three-quarters of the shares (and has controlled since 2007) with Danamon.
The New News
This morning’s paper carried a giant notice in bahasa announcing the planned merger between BDMN and BNP with shareholder vote for both banks 26 March 2019 (record date 1 March) and effective date 1 May 2019. The Boards of Directors and Boards of Commissioners of each bank
“view that this Merger will increase the value of the company because it is a positive move for stakeholders, including the shareholders of Bank Danamon,” and
“have proposed to their shareholders to agree with the resolution on the proposed Merger in each of their respective GMS.”
Indonesian takeover procedures generally require a Mandatory Takeover Offer procedure when someone goes over a 50% holding. But banks being bought by foreigners are a different category and bank takeovers are regulated by the OJK. In addition, the structure of such takeovers creates short-term options (for holders) and possibly longer-term obligations for the acquiror which are a little unusual, but provide for a very interesting opportunity in this case.
This week’s offering of Insights across ASEAN@Smartkarmais filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up pieces. Please find a brief summary below, with a fuller write up in the detailed section.
In Singapore Real Deals (Jan 2019 Issue 1, Anni Kum launches a new regular product commenting on significant developments in the Singapore property sector. Singapore Real Deals is a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In the first issue of Singapore Real Deals, she will dive into the first property launch in Prime District 9 in 2019, RV Altitude, to get a sense of the product mix and pricing strategies that developers are adopting in a price-sensitive market.
BI held its benchmark rate steady due to current account concerns; in any event, bank credit growth suggests that the economy has considerable momentum despite international headwinds and the 2018 rate hikes. Widodo did enough to surpass Prabowo in the 1st of 5 presidential debates, although Prabowo avoided gaffes and both candidates lacked energy. Dubbed a ‘dud’ in headlines, it at least featured constructive discussion of bureaucratic reform. Widodo also promised a National Legislative Center to rectify conflicting and excessive regulation. A Charta Politik poll shows steady margins for Widodo and PDI-P as of late December and the sole reform-minded party, the new PSI, finally registered support of 1.5%. Planners remain at odds over a location for a downtown terminus of Jakarta’s elevated LRT — a project crucial for complementing the imminent MRT.
Politics: Despite a critical domestic press reaction and a lack of sensational moments, the first presidential debate produced the most detailed high‑level discussion of bureaucratic reform in more than a decade. Overall, President Joko Widodo fared better than his challenger, Gerindra Chair Prabowo Subianto, but both seemed lacking in energy. Both also succeeded in avoiding pitfalls: Widodo’s running mate, the aging cleric Mar’uf Amin, caused no major embarrassment for the ticket; and Prabowo maintained an even temper with no unseemly rants. The candidates traded barbs: Prabowo hit home by questioning Widodo’s decision to appoint a “top law enforcement official” (i.e., the attorney general) who is a party representative; and Widodo twice inflicted damage by citing Gerindra’s lack of women in its leadership and its nomination of corruption convicts for legislative offices. Widodo unveiled a plan for a National Legislative Center (Puslegnas). The debate, translated in full by Ref Wkly, seems unlikely to alter the candidates’ poll positions (Page 2). The president approved the release of the 80‑year‑old icon of terrorist groups, Abu Bakar Basyir (p. 15). Widodo visited a fair for businesses run by impoverished households and, oddly, purchased 100,000 1‑liter bottles of dishsoap from one vendor. At best, the episode may indicate a preoccupation with his family’s catering business; at worst, it shows haphazard handling of his personal finances (p. 16).
Surveys: Charta Politik measured President Joko Widodo’s margin as being virtually unchanged at 19 percentage points in late December. It also confirmed that PDI‑P’s nomination of Widodo is a major reason for its popular support. The pro‑reform Solidarity Party (PSI) finally registered detectable support of 1.5 percent (p. 17).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Infrastructure: Differences between the central and provincial government persist over where to locate the terminus of the Light Rail Train (LRT) in downtown Jakarta. A large land plot south of Landmark Tower has been vacant for decades – but the central government prefers a less central location (p. 19).
Economics: The rupiah has partially rebounded amid easier external financing conditions in recent weeks, but Bank Indonesia (BI) nonetheless decided this week to maintain its benchmark rate at 6.0 percent – due to a persistently high current account deficit. In part, the deficit reflects Indonesia’s considerable economic momentum. Nonetheless, rising fuel imports and falling oil production signal continued current account pressure ahead, necessitating vigilance from BI (p. 20).
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Trawling through >1500 global banks, based on the last quarter of reported Balance Sheets, we apply the discipline of the PH Score™ , a value-quality fundamental momentum screen, plus a low RSI screen, and a low Franchise Valuation (FV) screen to deliver our latest rankings for global banks.
While not all of top decile 1 scores are a buy – some are value traps while others maybe somewhat small and obscure and traded sparsely- the bottom decile names should awaken caution. We would be hard pressed to recommend some of the more popular and fashionable names from the bottom decile. Names such as ICICI Bank Ltd (ICICIBC IN) , Credicorp of Peru, Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB US) are EM favourites. Their share prices have performed well for an extended period and thus carry valuation risk. They represent pricey quality in some cases. They are not priced for disappointment but rather for hope. Are the constituents of the bottom decile not fertile grounds for short sellers?
Why pay top dollar for a bank franchise given risks related to domestic (let alone global) politics and the economy? Some investors and analysts have expressed “inspiration” for developments in Brazil and Argentina. But Brazilian bonds are now trading as if the country is Investment Grade again. (This is relevant for banks especially). Guedes and co. may deliver on pension/social security reform. If so, prices will become even more inflated. But what happens if they don’t deliver on reform? Why pay top dollar for hope given the ramp up in prices already? Argentina is an even more fragile “hope narrative”. More of a “Hope take 2”. Similar to Brazil, bank Franchise Valuations are elevated. While the current account adjustment and easing inflation are to be expected, the political and social scene will be a challenge. LATAM seems to be “hot” again with investment bankers talking of resilience. But resilience is different from valuation. Banks from Chile, Peru, and Colombia feature in the bottom decile too. If an investor wants to be in these markets and desires bank exposure, surely it makes sense to look for the best value on offer. Grupo Aval Acciones y Valores (AVAL CB) may represent one such opportunity.
Our bottom decile rankings feature a great deal of banks from Indonesia. In a promising market such as Indonesia, given bank valuations, one needs to tread extremely carefully to not end up paying over the odds, to not pay for extrapolation. In addition, India is a susceptible jurisdiction for any bank operating there – no bank is “superhuman” and especially not at the prices on offer for the popular private sector “winners”. Saudi Arabia is another market that suddenly became popular last year. We are mindful of valuations and FX.
Does it not make more sense to look at opportunity in the top decile? While some of the names here will be too small or illiquid (mea culpa), there are genuine portfolio candidates. South Korea stands out in the rankings. Woori Bank (WF US) is top of the rankings after a share price plunge related to a stock overhang but this will pass. Hana Financial (086790 KS) , Industrial Bank of Korea (IBK LX) and DGB Financial Group (139130 KS) are portfolio candidates. Elsewhere, Russia and Vietnam rightly feature while Sri Lanka and Pakistan contribute some names despite very real political and macro risks. We would caution on some of the relatively small Chinese names but recommend the big 4 versus EM peers – they are not expensive. In fact some of the big 4 feature in decile 2 of our rankings. There are many Japanese banks here too. And many, like some Chinese lenders, are cheap for a reason. While the technical picture for Japanese banks is bearish, at some stage selective weeding out of opportunity within Japan’s banking sector may be rewarding. The megabanks are certainly not dear. Europe is another matter. Despite valuations, we are cautious on French lenders and on German consolidation narratives – did a merger of 2 weak banks ever deliver shareholder value? The inclusion of two Romanian banks in the top decile is somewhat of a headscratcher. These are perfectly investable opportunities but share prices have been poor of late.
Leading Indonesian mini-mart operator Sumber Alfaria Trijaya Tbk P (AMRT IJ) (Alfamart) has undergone quite a dramatic transformation over the past 12 months, with a dramatic slowdown in its new store buildout paving the way for a significant pick up in SSSG and a reduction in debt.
The company plans to start to step up its store openings selectively over the next year, with 500 new stores planned and fewer closures. Last year it only opened net 200 new stores having opened 1200 stores the previous year.
The market segment continues to see consolidation, with supermarkets and hypermarts suffering and mini-markets continuing to gain ground as the “pantry of the middle-class”.
The company continues to grow its fee-income business, which is highly profitable, with increasing collaboration with utilities, finance companies, and e-commerce players to name but a few.
After a difficult 2017, Sumber Alfaria Trijaya Tbk P (AMRT IJ) looks to be well and truly back on a growth trajectory, with a rationalisation of its stores, a slow down in its expansion, reduced gearing, and a focus on operational efficiencies. The Mini-market continues to win out in the retail space and is increasingly being used as a distribution network for e-commerce companies. The growth in fee-service from bill payment and other services will be positive for the bottom line. The stock is by no means cheap on a PE basis but provides quite unique exposure to what is still a high-growth area of the economy. According to Capital IQ consensus estimates, the company trades on 51x FY19E PER and 44x FY20E PER, with forecast EPS growth of +30% and +16% for FY19E and FY20E respectively.
Uzbekistan’s economy is a frontier market stand out and has a large number of attractive characteristics:
Uzbekistan’s stock market trades at a substantial discount to other frontier markets, though the extremely illiquid nature of the market makes it hard to trade. However, there still is foreign interest in the market.
The IMF projects that the economy will grow by 5% during 2018 and 2019, and eventually reach 6% by 2022, though this is still below its historical high.
Market reforms were spearheaded in December 2016 when the newly elected president, Shavkat Mirziyoyev decided to transition towards a market- oriented economy led by private sector growth, as the public sector was unable to create enough jobs. This represents a significant shift given that Uzbekistan had been a closed, centrally planned economy until 2016.
Tourist arrivals grew by 91.6% during H1 2018, and this is poised to improve greater in the future due to the impact of the visa liberalization measures.
Twin deficits have remained under control and Uzbekistan is one of few current account surplus frontier markets.
Uzbekistan is also very attractive compared to other markets in the frontier space given that its minimum wage is only US$24/month, compared to around $70-75/month in Kyrgyzstan and Kazakhstan.
The market reforms that the country recently implemented will be a major catalyst for future economic growth and makes investment in this market appealing. Apart from strong growth, the market is also appealing due to its high foreign exchange reserves ( nearly 2 years of import cover), consistent CA surplus, and stable currency. My latest frontier and emerging market recap highlights the appeals of markets such as Bangladesh, Vietnam, and Egypt, while expressing concerns for markets such as Sri Lanka and Pakistan. Uzbekistan is a suitable addition given its stable macro/political picture, and the main negative factor of this market is the highly inaccessible nature of the equity market. The ADTV is less than $100,000, which is a far cry from other frontier markets like Romania, Sri Lanka and Kenya.
Highlights of significant recent happenings include:
Substantive Deep Dive – Canada’s BlackBerry Ltd (BB CN) seeks to be the go-to provider of web Security: Why we believe investors should look at Blackberry as a way to hedge their exposures to the increasing list of companies who are susceptible to adverse impact from security breaches.
Feeding the Dragon – Chinese buying of US firms brakes abruptly, obliterating the long-term trend, and now Japan has become the second-largest market for outbound M&A globally. Also, South Korean food giant Cj Cheiljedang (097950 KS) is continuing its aggressive expansion into the U.S. market
Wars in old times were made to get slaves. The modern implement of imposing slavery is debt. Ezra Pound
Governments used public sector balance sheets to bail out private financial institutions and assist private companies to emerge from bankruptcy in the GFC. These actions transferred credit risk from the private to the public sector, yet falling nominal interest rates minimised, and in some cases froze, the cost of servicing the mounting government debt until late 2016. Since then, many borrowers have paid rising interest rates on increasing amounts of debt. Debt service charges are rising faster than nominal GDP in a growing number of nations as a result. It is estimated that the US federal funding requirement will rise from minus US$ 700bn to US$ 2tr in 2022.
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2018 was a year to forget for many active GEM managers. Absolute returns were the worst since 2011 and, relative to the I-Shares MSCI Emerging Markets ETF, active funds registered their first average underperformance since 2008. Here we share some of the key data points on active fund performance for 2018 and over the longer term.
There is a certain scenario in which the Indonesian market in 2019 could outperform on relative basis. If global growth slows while the resilient household sector holds up, capital inflows coud prove sufficient to cover the current account and avert yet more depreciation.
An adverse policy framework is depressing key sectors and hampering investment – at a time when the current account deficit (Cad) is jeopardizing stability. The administration of President Joko Widodo, who is cruising to re-election, shows little urgency about rectifying recent declines in Foreign Direct Investment (FDI). These concerns have underpinned our bearish outlook for the market in 2019 (see Indonesia: The Year of Dithering Dangerously). But in the event of a sharp global slowdown this year, Indonesia has potential – on a relative basis – to outperform.
Indonesia’s economy is poorly integrated with the international arena, and this ‘decoupling’ can offer insulation from global turbulence under certain conditions. And the key driver of GDP is household consumption, which has shown resiliency by sustaining a 4.9‑5.1 percent pace of annual growth over the past five years. As global growth deteriorates, Indonesia’s stalwart consumer‑growth engine may stand out and garner attention; if so, this may attract the capital inflows needed to cover the Cad.
However, risks remain high due to a background context that features policy flaws and institutional dysfunctions. Reforms to address the investment climate could bring about a substantial upward re‑rating – but prospects for Widodo to move assertively in this direction seem poor. In the continued absence of meaningful reforms, macro-economic stability will remain fragile, vulnerable to abrupt reversals in short‑term portfolio flows. Given Indonesia’s weak export performance and growing dependence on imported oil, the currency would face renewed pressure in the event of excessive Federal Reserve hikes or global shocks. However, in a scenario of global deceleration without undue turbulence, Indonesia has potential to outperform.
A very normal part of the semiconductor cycle is inventory clearance. DRAM makers are starting to discuss this in their earnings calls. What they are NOT telling their investors is how significant this is to the onset of a price collapse, perhaps because they don’t understand it themselves. This Insight will help readers to learn how and why an inventory clearance helps ratchet a budding oversupply into a full-blown glut.
INVESTMENT VIEW: The Australian Bureau of Meteorology has just downgraded its risk of El Niño from ‘Alert’ to ‘Watch’, and as a result, we temper our optimism for a near-term rally in CPO prices. Longer-term, we remain bullish on Golden Agri Resources (GGR SP), but higher CPO prices remain a key catalyst for our bullish call on the shares.
We opine that Jokowi (incumbent President) is the best performer/debater in terms of public speaking and argument skills during the first Indo presidential debate.
What stands out to us is the display of stark personality differences between Jokowi (humble, down to earth) and Prabowo (hard-nosed, tough minded).
The debate improves Jokowi’s likelihood of getting re-elected (a positive catalyst to Indo stock market), in our opinion.
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INVESTMENT VIEW: The Australian Bureau of Meteorology has just downgraded its risk of El Niño from ‘Alert’ to ‘Watch’, and as a result, we temper our optimism for a near-term rally in CPO prices. Longer-term, we remain bullish on Golden Agri Resources (GGR SP), but higher CPO prices remain a key catalyst for our bullish call on the shares.
We opine that Jokowi (incumbent President) is the best performer/debater in terms of public speaking and argument skills during the first Indo presidential debate.
What stands out to us is the display of stark personality differences between Jokowi (humble, down to earth) and Prabowo (hard-nosed, tough minded).
The debate improves Jokowi’s likelihood of getting re-elected (a positive catalyst to Indo stock market), in our opinion.
The dramatic defeat of PM May’s Brexit arrangement with the EU was seen by the markets as a positive development. Apparently the markets believe that this could result in Britain remaining in the EU.
While we agree this would be good news we consider it unlikely without many more months or years of uncertainty as another referendum is organized and implemented.
Romania: GDP in Q3 grew 4.4% y/y, up from 4.1% in Q2. The country’s economy is doing better than most EU countries. Brazil: The CPI in Dec rose 3.7%, down from 4.05% in Nov. Lowest rate since May, as prices slowed for food and fuel. India: The trade deficit in Dec narrowed to $13.1 bn. Exports rose a meager 0.3% and imports fell 2.44%. GDP growth of 7% is expected for this year and next..
The globe is facing more than an ordinary business cycle.
Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.
MUFG initially bought 19.9 percent of Bank Danamon from Singapore state investor Temasek Holdings 15.875 trillion rupiah ($1.17 billion), then valuing the Indonesian lender at around $6 billion.
Step 2 saw the OJK give the OK (BDMN announcement in English) for MUFG to up its holding to 40% – the statutory maximum under the prevailing OJK regulation No.56/POJK 03/2016 – and the Indonesian Financial Services Authority (OJK), seemingly granted permission for MUFG to go above 40% in Bank Danamon when OJK deputy commissioner for banking, Heru Kristyana, wrote in a message to a Reuters journalist (article here) on August 3rd last year “They (MUFG) can have a larger stake than 40 percent once the merger (with Bank Nusantara) has gone through and as long as they meet provisions and requirements.”
As Johannes Salim, CFA pointed out in his interesting insight Bank Danamon: Fundamentals Revisited Plus Thoughts on M&A in March last year, the revised OJK regulation No.56/POJK 03/2016 placed the authority for determining whether or not a foreign acquiror could go above 40% squarely on the OJK – no BI approval would be necessary.
Indonesia has a “Single Presence Policy” (OJK Regulation No. 39/2017) which requires that a foreign owner may not hold more than one control stake in a bank. In order to get to Step 3 which would be to acquire the remaining 33.8% of Danamon from Temasek affiliates (Asia Financial Indonesia and its affiliates), MUFG would need to merge its presence in Bank Nusantara Parahyangan (BBNP IJ) (also known as “BNP”) where it holds more than three-quarters of the shares (and has controlled since 2007) with Danamon.
The New News
This morning’s paper carried a giant notice in bahasa announcing the planned merger between BDMN and BNP with shareholder vote for both banks 26 March 2019 (record date 1 March) and effective date 1 May 2019. The Boards of Directors and Boards of Commissioners of each bank
“view that this Merger will increase the value of the company because it is a positive move for stakeholders, including the shareholders of Bank Danamon,” and
“have proposed to their shareholders to agree with the resolution on the proposed Merger in each of their respective GMS.”
Indonesian takeover procedures generally require a Mandatory Takeover Offer procedure when someone goes over a 50% holding. But banks being bought by foreigners are a different category and bank takeovers are regulated by the OJK. In addition, the structure of such takeovers creates short-term options (for holders) and possibly longer-term obligations for the acquiror which are a little unusual, but provide for a very interesting opportunity in this case.
There is a trade here.
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