Flash News

Is that true when bond yield plunging, the equity rally to continue ?

What happened on the bond market?

Massive inflows to EM and global markets hitting all-time high, the IDR government bonds of Indonesia (GOI) 10-year bond yield has plunged to a 3-year low of 6.19 % & the spread to US10Y yield narrowed to 372bps.

So what are the triggers?  The tight yield spread was due to broad EM inflows and a successful bond auction on Wednesday in which investors ( mostly foreign) poured in Rp86.2 trillion (US$6.4bn) of bids, exceeding the previous Rp56.8 trillion record set in August last year. This allowed the Indonesian government to raise the maximum amount of Rp25.5 trillion (US$1.0bn) or 1.5 times the Rp17 trillion target. With the last the last auction, foreigners now own about 40% of all outstanding Indonesia government bonds.

Equity markets having a good start of the year

Regional equities saw a rush of foreign inflow but mostly in still in north Asia markets. Contrary to perceptions that volumes would dry up because of Mifid,  foreign funds are nett buying of US$1.7 bn in just the first three trading days of January. While it is very early days, net foreign buying is largely in Korea (US$0.7 bn), Taiwan (US$0.5 bn) and India (US$0.2 bn). We are also seeing net foreign buying in ASEAN. While the amount is minimal, Indonesia is seeing net foreign buying after eight consecutive months of net foreign selling

Relationship between bond and equity

The idea is hunger for yield investors invest in Indonesia bonds (and the rest of EM) during a risk-on cycle and they exit when global risk appetite goes the other way. Given the yield spread still on a declining trend in our view, it does seem to suggest that Indonesia equities should continue to perform well in the medium term.

Now, the next question is …will foreign money return to Indonesian equity? Probably so, as :

  1. Indonesia earnings growth relative to the region is higher in 2018 than in 2017.
  2. Quality of expected earnings growth in 2018 is better as it is driven by financials (mainly credit cost improvement), consumer staples & discretionary (consumption recovery) and telcos (data growth story).
  3. Indonesia is amongst the worst performer in the region last year and historically Indonesia swings from worst performer to best performer year to year.