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Risk on!

October 30th, 2020

Bond yields to surge ...

GDP
In the midst of all the 134 corporate results we’re covering, of course we have to pay attention to the total economic picture & GDP numbers. Just like the corporate cousins, America beats Indonesia as first to report the 3Q GDP data, last night... So, what does it say? Is the US in a recession..? The quick answer is, no.

Recession
When we look at GDP, we never use the ‘real’ GDP which is not real at all as it use a fuzzy deflator which is a made up number. We use the real nominal GDP in USD. For a recession there should be two consecutive quarters of negative growth on an annual basis (sort of compared to a year ago).

No
To get our annual growth rate, just as we did with Indonesian corporate sales last time... we use the quarter to quarter percent change. This was -9.9% in the 2Q then. +9% in 3Q. Then we annualize using a 4 quarter average. This was -2.2% in the 2Q, -0.2% in the 3Q. If we round up to 0%... no recession.

Bonds
As we’ve mentioned many times before, the securities market which most closely matches US economic growth is the US 10 year bond yield. The yield has collapsed this year from 2% to just 0.5% until recently. The yield has now moved up to 0.8%. But comparing with the GDP growth shows that yields should now rise back up above 2%.

Indonesia
What does this mean for Indonesia. The US economy is doing amazingly well & recovering much faster than anyone imagined possible. That will help us. Most important, rising bond yields are associated with rising demand from investors for risk. As Indonesian stocks are considered more risky this means more demand, foreign investor inflows & a surge in the JCI index.
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