Daily Indonesia: The Bull Case for 2019: If Household Spending Stands Out (And Funding Finally Flows In) and more

In this briefing:

1. The Bull Case for 2019: If Household Spending Stands Out (And Funding Finally Flows In)
2. Inventory Clearance and the Semiconductor Cycle
3. Golden Agri:  Reduced Risk of El Niño Pushes Out CPO Price Recovery into 2020
4. Indo Politics: Key Takeaways from First Presidential Debate
5. RRG Global Macro Weekly – Dramatic Brexit Defeat A Positive for Markets? We Are Not So Sanguine

1. The Bull Case for 2019: If Household Spending Stands Out (And Funding Finally Flows In)

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. 

2. Inventory Clearance and the Semiconductor Cycle

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.

3. Golden Agri:  Reduced Risk of El Niño Pushes Out CPO Price Recovery into 2020

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. 

4. Indo Politics: Key Takeaways from First Presidential Debate

• 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.

5. RRG Global Macro Weekly – Dramatic Brexit Defeat A Positive for Markets? We Are Not So Sanguine

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..