Previously on Sharpfokus
The rupiah beneficiary? 🌴 Sharpfokus108
September 15th, 2019
⏰ 2 minute read
⏰ 2 minute read
Rupiah
The big event of the week is without any doubt the rupiah strengthening to below 14,000 to the $. This is the second time it’s happened. The first earlier this year quickly reversed. We think not only that this one is here to stay, but that the currency is going to get a lot stronger & here’s the biggest beneficiary....
Personal
Imports
The first thing which happens when the rupiah strengthens is the things we need get cheaper. That’s definitely great. We didn’t invent iPhones, iPads & the like. But that’s fine. We can import them to be more productive & make more money. There’s absolutely nothing wrong with importing. In fact it’s essential. We know there’s a perfect relationship between imports & the JCI index. A stronger rupiah means we can import more.
Wealth
Everything we do make here also uses $s. The most basic commodities are in $s, also equipment to make things & technology to run things. When the rupiah strengthens we therefore all get richer with greater purchasing power. This enables us to have more choices & perhaps more importantly getting richer helps our confidence so we can be bolder & do more.
Size
A stronger rupiah also makes us much bigger. Our economy in $s can finally leave the $1tn level behind & we can move higher to $2, 3tn & beyond. It’s been 8 years since we first reached the $1tn level & we are still there. In recent years 3 US companies have reached $1tn & overtaken us. Now it’s time for us to start winning the size race again & gain much more attention as a result.
Debt
Essential
The second benefit of a stronger rupiah also started to happen last week. Interest rates can fall. This was already happening with a more stable rupiah, now with a stronger one the interest rate fall will accelerate. Lower interest rates means we can have more debt. Debt is essential. The 70:30 debt:equity magic story is as old as time; borrow, build, repay & the value of the equity soars.
Deflated
But this age old mechanism hadn’t been working. Our economy has been deflated for a long time. We are debt inverted. Bank deposits are higher than loans. This has brought our economic growth eventually down to 0% growth in $s. As the rupiah declined in recent years, interest rates went up & many companies which expanded with rupiah debt have struggled instead of benefitting.
Working
But we notice that this has already stated to change. From our new stocks coverage of now 42 listed companies, the best performing stocks over the last one year (& mostly they’re recent gains) are those with the biggest negative free cash flow, meaning the biggest increase in debt. Our top 10 performers have an average 1 year return of 80%; 7 have large negative free cash flow & 9 out of 10 have large debt. Debt is starting to work again.
Palm oil
Deflated
Is there a particular sector which could benefit most in future from this rupiah strength? Yes, palm oil. First because a stronger rupiah represents growth versus deflation & palm oil is one of, if not the most deflated thing around. It’s easy to see this when you know that the palm oil price first reached $1,000 in 1984 & today over 30 years later it’s just over $500! It’s long due time to reverse.
Rupiah
Second, while many think of palm oil as a hedge against the rupiah’s decline, the opposite is true. The palm oil price almost perfectly follows the rupiah. Now the rupiah has stabilized, the palm oil price has followed & with rupiah below 14k palm oil should move higher too. The reason is simple. Indonesia is not only the biggest palm oil producer, we are the biggest consumer. Better purchasing power means higher consumption & price.
Debt
Also, most of the palm oil stocks have debt, especially the young ones. More recently even the older ones have been building up debt to pay for replanting. Since the first quarter of last year, the 7 main Indonesian plantations we cover which don’t have refineries, have seen debt rise 42% & the shares are all down double digit %s from a year ago. This debt can now become an asset with lower interest rates & rising prices.
Saham
Palm oil can best benefit from higher purchasing power from a stronger rupiah & from lower rupiah interest rates from a strong rupiah. Can we narrow our search down further? Yes, we can. While all debt related to Indonesian palm oil companies will get cheaper no matter which currency it’s in as risk premiums will fall, the company which has the largest rupiah-only debt will be the biggest beneficiary of all. Can you guess which one that is? Sign up for Saham to find out.
Be a great investor!
Sebastian
The big event of the week is without any doubt the rupiah strengthening to below 14,000 to the $. This is the second time it’s happened. The first earlier this year quickly reversed. We think not only that this one is here to stay, but that the currency is going to get a lot stronger & here’s the biggest beneficiary....
Personal
Imports
The first thing which happens when the rupiah strengthens is the things we need get cheaper. That’s definitely great. We didn’t invent iPhones, iPads & the like. But that’s fine. We can import them to be more productive & make more money. There’s absolutely nothing wrong with importing. In fact it’s essential. We know there’s a perfect relationship between imports & the JCI index. A stronger rupiah means we can import more.
Wealth
Everything we do make here also uses $s. The most basic commodities are in $s, also equipment to make things & technology to run things. When the rupiah strengthens we therefore all get richer with greater purchasing power. This enables us to have more choices & perhaps more importantly getting richer helps our confidence so we can be bolder & do more.
Size
A stronger rupiah also makes us much bigger. Our economy in $s can finally leave the $1tn level behind & we can move higher to $2, 3tn & beyond. It’s been 8 years since we first reached the $1tn level & we are still there. In recent years 3 US companies have reached $1tn & overtaken us. Now it’s time for us to start winning the size race again & gain much more attention as a result.
Debt
Essential
The second benefit of a stronger rupiah also started to happen last week. Interest rates can fall. This was already happening with a more stable rupiah, now with a stronger one the interest rate fall will accelerate. Lower interest rates means we can have more debt. Debt is essential. The 70:30 debt:equity magic story is as old as time; borrow, build, repay & the value of the equity soars.
Deflated
But this age old mechanism hadn’t been working. Our economy has been deflated for a long time. We are debt inverted. Bank deposits are higher than loans. This has brought our economic growth eventually down to 0% growth in $s. As the rupiah declined in recent years, interest rates went up & many companies which expanded with rupiah debt have struggled instead of benefitting.
Working
But we notice that this has already stated to change. From our new stocks coverage of now 42 listed companies, the best performing stocks over the last one year (& mostly they’re recent gains) are those with the biggest negative free cash flow, meaning the biggest increase in debt. Our top 10 performers have an average 1 year return of 80%; 7 have large negative free cash flow & 9 out of 10 have large debt. Debt is starting to work again.
Palm oil
Deflated
Is there a particular sector which could benefit most in future from this rupiah strength? Yes, palm oil. First because a stronger rupiah represents growth versus deflation & palm oil is one of, if not the most deflated thing around. It’s easy to see this when you know that the palm oil price first reached $1,000 in 1984 & today over 30 years later it’s just over $500! It’s long due time to reverse.
Rupiah
Second, while many think of palm oil as a hedge against the rupiah’s decline, the opposite is true. The palm oil price almost perfectly follows the rupiah. Now the rupiah has stabilized, the palm oil price has followed & with rupiah below 14k palm oil should move higher too. The reason is simple. Indonesia is not only the biggest palm oil producer, we are the biggest consumer. Better purchasing power means higher consumption & price.
Debt
Also, most of the palm oil stocks have debt, especially the young ones. More recently even the older ones have been building up debt to pay for replanting. Since the first quarter of last year, the 7 main Indonesian plantations we cover which don’t have refineries, have seen debt rise 42% & the shares are all down double digit %s from a year ago. This debt can now become an asset with lower interest rates & rising prices.
Saham
Palm oil can best benefit from higher purchasing power from a stronger rupiah & from lower rupiah interest rates from a strong rupiah. Can we narrow our search down further? Yes, we can. While all debt related to Indonesian palm oil companies will get cheaper no matter which currency it’s in as risk premiums will fall, the company which has the largest rupiah-only debt will be the biggest beneficiary of all. Can you guess which one that is? Sign up for Saham to find out.
Be a great investor!
Sebastian
