Market Outlook featuring John Rachmat, Pinnacle Investment

Welcoming Second Quarter of 2020 and Preparation in the Midst of Market Volatility


Hi Moduers,

Time flies and without realizing we almost enter second quarter of 2020. So how is the progress of your investment resolution?

A lot of things happened in the beginning of this year, such as positive progress from phase 1 trade deal agreement between US and China has been signed in January 2020 and also negative sentiment from the global economic slow down coupled with the outbreak of Corona Virus (COVID-19) with more than 2,200 victims as per 21 February 2020.


Do you want to know more about the market view especially to help you better prepare for second quarter?

Let’s follow through because we have collaborated with one of our Investment Manager partner, Pinnacle Investment, to discuss about view on capital market especially for you to prepare for second quarter. And in this special occasion, we have discussed with John Rachmat, Strategist of Pinnacle Investment. He has more than 30 years experience in the financial industry, with various roles such as Head of Investment and Research in Mandiri Investment Management Singapore and Head of Equity Research in Mandiri Sekuritas.

Wow! This is such a rare opportunity to be able to discuss with him due to his packed schedule. So, let’s check it out, Moduers! 😊


So far we always feel that US market movement can be considered as benchmark to predict market movement in Asia Pacific, including Indonesia. In your view, what is the correlation between current world’s equity market?

In my view, the correlation between US market and Asia Pacific including Indonesia has broken, which means US market performance no longer reflects market performance in Asia, including Indonesia.

If we look at the historical performance between US market, Asia Pacific market and Indonesia market, 2017 was the last year where equity market performed extremely positive where US market and Indonesia market both grow around 19%-20%. In 2018, almost all market globally performed negatively: S&P500 (USD) -6.24%, DAX (EUR) -18.26% but Indonesia still performed better compared to others with negative performance of only -2.54%. However, 2019 shows different pattern where global index performed extremely strong: S&P500 (USD) +28,88%, DAX (EUR) +25,48% but index in Asia did not perform as strong as global.


Looking at the decrease in Indonesia economic growth with latest release below 5%, what is your view on the earnings growth in Indonesia?

Pinnacle is an Investment Manager company that is based on Quantitative Investment, which is data driven where Pinnacle tries to look at the aggregate. As for corporate earnings, if we look at the stocks in LQ45, where the stocks are more liquid, we see there is an improvement in the aggregate earnings per share on quarterly basis based on the weightage. The growth trend for top-liner has reached its peak in 2018 and experienced down-trend ever since. In third quarter of 2019, top liner grew only 7%-8%. Aside from that, eaernings per share has reached its peak in early 2017 and started slowing down until reaching negative value in 2018. However, earnings per share was positive in both first and second quarter of 2019 eventhough it returned negative in the third quarter of 2019.


So far, we always feel the performance of equity market and earnings growth have positive correlation. What is your view on the correlation between Indonesia equity market and earnings growth in Indonesia?

Referring to year 2013 and 2015, earnings per share (EPS) growth was negative. When ePS growth was negative in 2013, JCI experienced the worst period there the maximum drawdown, which refers to the decrease comparing the highest and lowest JCI value during the period, was almost 24% before it rebounded. Similarly in 2015, EPS growth too was negative and the maximum drawdown of JCI was almost 26% before market rebounded. However, the mentioned event did not happen in 2018 and 2019. In 2018 and 2019 when the growth of LQ45 was negative, JCI only corrected by almost 10%. One of the case is due to low foreign investor participation.


There are 2 components from foreign investors: active and passive investors. In the US, passive products such as ETF and Index Fund has become increasingly popular and highly demanded by market. This means passive foreign investor will invest in accordance to index composition. When China was included in the MSCI Asia Pacific ex Japan, portion of indonesia in the index becomes smaller. Similarly, during Aramco IPO where Middle East was included into Emerging Market, portion of Indonesia gets even smaller in the index. Aside from passive foreign investors, there are also active foreign investors who allocate their portfolio by looking at the macroeconomy fundamental. With current Indonesia quite weak macroeconomy, active foreign investors do not overweight in Indonesia equity.


Moreover, local investors have been investing in Indonesia equity market and support the market which resulted in market not experiencing deep correction. This has caused Indonesia market to be restrained and not corrected much hence does not reach an attractive level for foreign investors. If the market is set free, market will reach one level that will be deemed as attractive by investor and that will the entry level where investors will start investing regardless of the fundamental condition. This will eventually help the market to rebound further or have further upside potential.

What are the factors that will support Indonesia equity market?

One of the most important factor that will support growth of Indonesia equity market is an improvement in Indonesia macroeconomy growth. Indonesia growth has decreased where the latest GDP release is only at 4.97%. Under the same condition, corporation in Indonesia is also not expected to have high earnings.

If there is no changes, equity market performance in 2020 will be similar to 2018-2019. This is caused eventhough there is no significant change in Indonesia macroeconomy, the valuation has not reached an attractive level yet due to supported by local investors. In my view, JCI level ranges between 5700/5800 – 6300/6400.

What are the factors (catalyst) that will further increase the performance of Indonesia equity market?

There are 2 options that could help support Indonesia equity market, such as attractive valuation or strong fundamental.

In my view, the most important factor to strengthen Indonesia fundamental and help increase Indonesia economy growth is investment spending or direct investment to Indonesia such as building factories or corporations in Indonesia. When US imposed tariff to China, this is deemed to be beneficial for Indonesia as companies in US, Europe or Japan will find alternative countries aside from China for expansion. However, there are certain challenges faced by foreign or local investors to invest in Indonesia, such as:

  1. Labor and employment due to high salary and wages in Indonesia. The increase in minimum wage has reached 5x if compared to the productivity level. This has resulted in low competitiveness of Indonesia. In addition, the employee termination policy is also one of the considerations for investors since Indonesia’s employee termination cost is 2x more expensive if compared to Vietnam.
  2. Local regulation (peraturan daerah) where it needs process simplication to open corporationis in Indonesia.


Hence, Omnibus law successful execution that includes labor and employment, taxation and local regulation is important to help the increase in economy growth and support Indonesia equity market. If the law is successfully executed, this will give positive sentiment for Indonesia equity market to increase, also supported by the steady growth in the economy.

Indonesia bonds market has so far performed better than equity market. What is your view on Indonesia bonds market?

I have bullish view for Indonesia bonds market. If compared to equity market that only grows by 1.7% in 2019, bonds market has grown by double digit during the same year. This is due to macro condition with down trend in global interest rate which in turn has caused bonds yield to be lower. In addition, quantitative easing from most Central Banks, such as The Fed (US), ECB (Europe) and BoJ (Japan) has increased the available cash in the economy which in turn used to invest in bonds market. Indonesia bonds market is benefited from higher yield if compared to other countries, for example Europe that gives negative yield.


One of the risks of investing in Indonesia bonds market, especially for foreign investor is currency risk since foreign investors invest in Rupiah currency. There are 2 factors that impact the currency: goods and services market (import and export) and capital flow. During the last few years, Indonesia has been a commodity dependent country, such as coal, palm oil and nickel. However, Indonesia export has decreased and reached weak level for the past few years.


Oil is the main factor for Indonesia. Indonesia is an oil net importer country where an increase in oil price will cause the current account deficit to widen which in turn will result in weakening of Rupiah currency. However, there is positive impact of COVID-19 for Rupiah, where this virus which might cause a slow down in the global economy and global trade is predicted to reduce demand for oil that is used for transportationi or airlines. According to the law of economy, decrease in demand for oil will reduce the price for oil and this condition will improve Indonesia current account deficit. This condition will be catalyst that support Rupiah to strengthen and will be a positive sentiment for Indonesia bonds market.

What are the risks that needs to be watched for Indonesia bonds market?

The risk for Indonesia bonds market will be part of the impact of COVID-19 virus. In my view, the impact of COVID-19 virus on Indonesia economy could be more than 0.1%, with higher impact on China economy definitely. It must be noted that China has a high debt-to-GDP ratio of approximately 300% (Indonesia debt-to-GDP ratio is at 60%). Many cities in China are locked down to prevent further spreading of COVID-19 virus and hence many factories and corporations are closed or only operate 50%. This will reduce corporate earnings.


If COVID-19 virus still continues until May, where according to survey from medical team, COVID-19 virus is predicted to not be able to stand warm weather, this will bring negative impact for China bonds market. It needs to be noted that many global investors invest in China bonds market under the category Emerging Market or Asia Pacific ex Japan. In 2019, many China bonds went default and this happened even before the outbreak of COVID-19 virus. COVID-19 virus is predicted to slow down China economy to below 6% which will increase the default risk of China bonds. Hence, if China bonds market crash, this will have negative impact for Indonesia bonds market. This is due to global investors might lose confidence and leave Emerging Market or Asia Pacific ex Japan bonds market and will increase the risk of Indonesia bonds market.


Based on my view, if there is a correction in Indonesia bonds market, there will be minimum effect. The risk will be more in Rupiah currency since foreign ownership of Indonesia bonds market comprises 38% of Indonesia bonds market. Therefore selling by foreign investors might result in weakening of Rupiah. However, correction in bonds market could become an opportunity to enter for investor and become opportunity for bonds market to grow another double digit in 2020.

What are your recommendation for investment strategy for Moduers?

We have bullish view for Indonesia bonds market hence we recommend Pinnacle Indo Bond Fund. However the progress of COVID-19 virus and the impact on global economic growth, especially China still needs to be monitored to determine view on Indonesia bonds market. For Moduers with higher risk tolerance (aggressive), you could invest in Pinnacle Strategic Equity Fund. Based on our view, JCI level of 5700/5800 is an attractive point of entry with potential upside to 6300/6400. However, to boost equity market futher, there needs to be stronger economic growth potentially from the successful execution of Omnibus Law. Last but not least, for Moduers who are more conservative, you could invest in Money Market Fund from Pinnacie such as Pinnacle Money Market Fund and Pinnacle Sharia Money Market Fund.


So, this is the summary of discussion with John Rachmat, Pinnacle Investment. Insightful, isn’t it?

Stay tuned for the next market discussion in the next article!