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2010 market outlook: Who will pull the trigger first?
During our recent Indonesia strategy marketing trip we spent two full days in Singapore and another two full days in Hong Kong, meeting with various fund managers
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uring our recent Indonesia strategy marketing trip we spent two full days in Singapore and another two full days in Hong Kong, meeting with various fund managers. We found that all of those in Singapore were still very much bullish on Indonesia, agreeing with us that the Indonesian market performance would be better in the first half of 2010 than in the second, because the risk of rising inflation and interest rates was expected to be higher in the second half of 2010.
Virtually everyone was overweight in cyclicals, with coal clearly the single-most preferred space. Some fund managers disagreed with us on banks, because of the contagion effect from regional de-rating, expensive valuations and concerns over loan growth — particularly given the reduced in spending on infrastructure in 2010. It is worth noting here that the Public Works Ministry will be spending only Rp 34 trillion in 2010, down 18 percent year on year.
In Hong Kong, fund managers had mixed views on Indonesia. Some were overweight on energy, again as the preferred area of exposure. We found this group of Hong Kong fund managers was in agreement with us to underweight the consumer sector because of rising raw materials prices, particularly sugar (up 123 percent year on year).
Some were neutral, adopting a trading stance because they believed easy money had been made and that markets (i.e. not just those in Indonesia) would be choppy this year because of the current global
market volatility.
Others were underweight or had no exposure in Indonesia. This set of fund managers believed Indonesia would not outperform its strong performance last year. With China tightening and the US dollar gaining strength, prices of commodities would disappoint, which is a negative for Indonesia because one-third of the Jakarta Composite Index (JCI) market capitalization is in commodity-related counters.
Many fund managers told us that regional strategists were all advising that markets around the region would perform better in the first half of 2010 than in the second. When we began our roadshow in Singapore, Bahana was also in this camp, believing that the first half would be a more benign period given that inflation and interest rates were set to remain low during this period.
However, with Singapore fund managers all planning to get out of the Indonesian markets by April-June, the first half of 2010 could turn out to be weaker than the second.
It is worth highlighting that in all meetings we faced more questions about Indonesia’s deteriorating political landscape than we have ever faced before — which is not surprising given the de-rating of the Thai market as a result of the political situation there. It is also worth highlighting that the House of Representatives inquiry committee for Bank Century is expected to provide its preliminary findings on Feb. 4 — but won’t present its final recommendations until March 4.
Theoretically speaking, if the Bank Century case is pursued, Indonesia’s political environment could remain tense until August, when the Constitutional Court is due to hand over the case to the People’s Consultative Assembly (MPR).
Coupled with concerns over China and the US markets, it is possible in our view that profit taking could occur sooner rather than later. In fact, 2010 is shaping up to be a year when big funds will pull the trigger first and exit the market.
The key to the success of stock market portfolios will lie in the timing of exit strategies. On the flip side, once the selling pressure subsides and valuations fall to more reasonable levels, the second half of 2010 could provide more lucrative entry levels for investors.
Happy trading!
