Previously on Sharpfokus
The turn around 🔄 Sharpfokus102
August 5th, 2019
⏰ 2 minute read
⏰ 2 minute read
Turning around
Other things aside, it’s been a tough week for financial news. The Fed flunked, German bond yields fell to almost -0.6%, equity markets have fallen. You could be forgiven for thinking it’s not the time to buy... but... it is. The UK is now weeks away from a boom & here in Indonesia 2 key things are turning around too!
Wrong
Fed
What’s wrong? It’s the economy of course. As we’ve been pointing out, outside the US, economies have been very weak for a long time. Now it’s becoming news & that’s good. Unfortunately the Fed didn’t get the memo & flunked the opportunity to give a big boost. Never mind, the markets do the job.
Bonds
Bond yields dropped sharply after the Fed non move. The markets are probably about 100 basis points ahead of the slow central bankers. US 10 year yields fell below 2%! The UK limped towards 0% & Germany broke new lows down to about -0.6%! Now suddenly there’s focus on recession there; no surprise..
HK
Normally fairly stoic HK is sadly getting drawn into the economic led malaise. These kind of things are sad to see & they don’t happen when economics is booming. I’m sure as things improve, the social situations will also. It’s quite surprising given the weakness that there hasn’t been more of this.
Budget
Drag
But things are getting better. On the horizon, the UK is finally going to get out of Europe which will lead to an economic boom, the like of which hasn’t been seen in decades. Ironically this will boost Europe too. Here in Indonesia things are also turning around. The first is the budget deficit, which was dragging us down.
Now
It’s amazing how things can suddenly look much better even without you noticing. The 12 month budget deficit was racing lower into the end of 2016 below Rp300tn. After a slight rally in 2017 it dove again to Rp350tn into 2018 & was one reasons the currency was so weak last year. Now? The 12 month deficit as of June at Rp285tn is less than end 2016!
Market
Not surprisingly, there has been a close relationship between the market performance & the budget deficit, especially since early last year when the push to raise revenues was especially high. Now that this pressure seems to be ebbing, with less government, the private sector can recover & stocks rise.
Saham
Cash flows
The problem here, is when the government decides to grow, it takes money out of the economy & of course the economy slows down. Companies particularly struggle because they cannot offset investments against taxes on operating profits. Last year we ended up with taxes more than free cash flows for our universe of mostly mid & small cap stocks.
Sales
We can see the resulting slowdown through the slowdown of sales. The last time of weakness in 2016 sales growth for our Saham stocks fell negative. It then recovered back to 20% by 2018, but as the tax take soared, it fell back to negative in the first quarter 2019. The second quarter has seen some rebound & sales growth is back to a small positive.
Cuts
The world needs three things. Lower interest rates & more liquidity, less regulation & lower taxes. Indonesia needs dramatically lower taxes to incentivize growth. But this is exactly what’s coming. Brexit will help to slash regulations, the Fed will have to catch up & the Indonesian government is promising a corporate tax cuts to 20%. They have no choice.
2016?
Now is the time for the turn around. Bond yields have returned to 2016 levels & even below (except in the US). Bond yields reflect economic growth. Economic growth is a reflection of corporate sales. Our corporate sales dropped sharply back to 2016 levels into the beginning of this year. But in the 2Q there are signs it’s starting to recover.
Be a great investor!
Sebastian
Other things aside, it’s been a tough week for financial news. The Fed flunked, German bond yields fell to almost -0.6%, equity markets have fallen. You could be forgiven for thinking it’s not the time to buy... but... it is. The UK is now weeks away from a boom & here in Indonesia 2 key things are turning around too!
Wrong
Fed
What’s wrong? It’s the economy of course. As we’ve been pointing out, outside the US, economies have been very weak for a long time. Now it’s becoming news & that’s good. Unfortunately the Fed didn’t get the memo & flunked the opportunity to give a big boost. Never mind, the markets do the job.
Bonds
Bond yields dropped sharply after the Fed non move. The markets are probably about 100 basis points ahead of the slow central bankers. US 10 year yields fell below 2%! The UK limped towards 0% & Germany broke new lows down to about -0.6%! Now suddenly there’s focus on recession there; no surprise..
HK
Normally fairly stoic HK is sadly getting drawn into the economic led malaise. These kind of things are sad to see & they don’t happen when economics is booming. I’m sure as things improve, the social situations will also. It’s quite surprising given the weakness that there hasn’t been more of this.
Budget
Drag
But things are getting better. On the horizon, the UK is finally going to get out of Europe which will lead to an economic boom, the like of which hasn’t been seen in decades. Ironically this will boost Europe too. Here in Indonesia things are also turning around. The first is the budget deficit, which was dragging us down.
Now
It’s amazing how things can suddenly look much better even without you noticing. The 12 month budget deficit was racing lower into the end of 2016 below Rp300tn. After a slight rally in 2017 it dove again to Rp350tn into 2018 & was one reasons the currency was so weak last year. Now? The 12 month deficit as of June at Rp285tn is less than end 2016!
Market
Not surprisingly, there has been a close relationship between the market performance & the budget deficit, especially since early last year when the push to raise revenues was especially high. Now that this pressure seems to be ebbing, with less government, the private sector can recover & stocks rise.
Saham
Cash flows
The problem here, is when the government decides to grow, it takes money out of the economy & of course the economy slows down. Companies particularly struggle because they cannot offset investments against taxes on operating profits. Last year we ended up with taxes more than free cash flows for our universe of mostly mid & small cap stocks.
Sales
We can see the resulting slowdown through the slowdown of sales. The last time of weakness in 2016 sales growth for our Saham stocks fell negative. It then recovered back to 20% by 2018, but as the tax take soared, it fell back to negative in the first quarter 2019. The second quarter has seen some rebound & sales growth is back to a small positive.
Cuts
The world needs three things. Lower interest rates & more liquidity, less regulation & lower taxes. Indonesia needs dramatically lower taxes to incentivize growth. But this is exactly what’s coming. Brexit will help to slash regulations, the Fed will have to catch up & the Indonesian government is promising a corporate tax cuts to 20%. They have no choice.
2016?
Now is the time for the turn around. Bond yields have returned to 2016 levels & even below (except in the US). Bond yields reflect economic growth. Economic growth is a reflection of corporate sales. Our corporate sales dropped sharply back to 2016 levels into the beginning of this year. But in the 2Q there are signs it’s starting to recover.
Be a great investor!
Sebastian
