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Economic Outlook 2020: Business earnings to recover from double dip
Indonesia is one of the Asian economies less exposed to the United States-China trade war. However, its exports have not been immune to the slowdown.
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Illustration of economic growth (Shutterstock/Number1411)
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usinesses endured a relatively challenging 2019, but we expect corporate earnings growth to recover in 2020, supported by improving domestic and external macro stability. We project a corresponding equity market upside of around 13 percent in 2020, based on our MSCI (Morgan Stanley Capital International) Indonesia index target of 7,800.
We forecast a 10 percent corporate earnings growth in 2020, up from 1 percent in 2019. Strengthening business confidence as a new Cabinet settles in, gradually improving economic growth and receding global headwinds are key drivers of our outlook.
The Cabinet formation should foster business conviction, as the new ministers are set to bring fresh initiatives, particularly in empowering state-owned enterprises (SOEs) and in tourism, as well as a transformational education system, which are essential for the human capital reform agenda.
Accelerating earnings growth would form a pattern of a recovery from the 2016 and 2019 double dip, as measured by a rolling five-year compound annual growth rate, or CAGR (see graphic).
After the 2014-2019 downcycle, in which CAGR earnings sank below nominal gross domestic product (GDP) growth, we expect corporate earnings growth to catch up with nominal GDP growth, which we forecast to reach 9 percent in 2020.
We see an upside in equities as the market does not seem to have factored in any recovery; the current market’s price-to-earnings valuation has fallen to around 1 standard deviation below its five-year mean.
The Indonesian equity market has also lagged behind its emerging market peers by around 8 percent year-to-date, despite being in the same bucket in the eyes of global investors.
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