Previously on Sharpfokus
The great switcheroo 🔄 Sharpfokus109
September 23rd, 2019
⏰ 2 minute read
⏰ 2 minute read
Week
Last week we got some great news! First, the Fed cut their interest rate. Then just 1 day later, Bank Indonesia cut theirs. Both cut by 25 basis points. Arguably economic growth comes from interest rates, tax & regulations. On Friday another domino fell as India cut their corporate tax rate to 25%! So why the muted market response to all this?
Central banks
Rates
The first reason is perhaps that central banks are being way too timid. In the US, the Fed cut their rate to the range of 1.75% to 2%. But the US 10-year bond yields just 1.68%, lower than the short term Fed rate. The Fed should have cut much more. Whatever the Fed does, BI should do double. Our rate is 6% or 3x the Fed. BI should have cut 75 points.
Liquidity
The central banks have been behaving oddly in other ways too. The job of the central bank is a simple one. Provide liquidity in the form of currency for the growing economy to use. But the Fed has been withdrawing money from the system by the $bn! Why would they want to do that? Not surprising this ended up causing a cash crunch & last week they had to add liquidity again. They should never have removed it.
FX
Over here we have a similar oddity. The Fed presumably was worried about inflation. Why do central banks worry about inflation when it’s their job to cause it? In Indonesia the similar worry is the value of the currency.... but there’s another department at BI which buys FX reserves. If they got together with the interest rate team, we could have both lower rates & a stronger currency, which would be great for growth.
Imports
Exports
No matter, despite the slowness of both central banks, we do think they’ll catch on eventually & we are starting to see more & more signs of faster growth. The latest data to come out for August is the trade data. For many people the key focus is exports. But exports are in fact for losers. The really interesting number is the imports and we like to see more of them.
Imports
Why are imports the better economic growth signal? Because they represent purchasing power. The strongest economies are the net importers. No surprise then that the signal best correlated with our stock market in $ terms is $ imports. The two have made an almost perfect match for years. As imports haven’t grown since 2011, the stock market has also ended up flat for the last 8 years.
August
After an attempted pick up in demand last year, imports collapsed again into 2019. But after a weak first quarter, imports have started to pick up again & have surged since June. 1Q imports were $40.7m, 2Q barely higher $41.5m. June was lowest of the year, just $11.5k. But July was $15.5m & August $16.8m. We could have a $50m 3Q, which would be a new high for the first time since 2011. Great news!
Sectors
Was
What was fascinating about last week was the internal performance of the stock market. There were sectors which did well & those which did less well & it matched perfectly with our thesis that what has done well for the last 12 years since the Fed last cut rates & what did not do well will now reverse.
Will
What has done well & badly in the last 12 years within the Indonesian stock market? The sectors which have done well are the banks & consumer stocks. The two number 1s have been HMSP & BBCA. Banks have taken over the top 10 as interests went up! What’s done badly has been mining, agriculture & infrastructure including utilities. That’s now going to reverse.
Week
If you’d invested that way last week you’d have made money, good money. The JCI index was down -2% for the week. HMSP had a horrid time, -16% & while BBCA was down a bit, BBRI the number 2 stock was down -3%. On the other side, TLKM was up 3%, AALI was up 4% & INCO was up 5%. We think there’s much more of that to come.
50
People often ask us how do we choose the stocks we cover? The answer is by focusing especially on these sectors. We are now up to 45 stocks under coverage. We have covered 10 palm oil plantations, the 3 main metal mining companies & all the telcos. Recently we’ve been spending a lot of time on infrastructure, cement, toll roads & construction. We will be up to 50 by the end of this week with some truly fascinating stories to follow.
Be a great investor!
Sebastian
Last week we got some great news! First, the Fed cut their interest rate. Then just 1 day later, Bank Indonesia cut theirs. Both cut by 25 basis points. Arguably economic growth comes from interest rates, tax & regulations. On Friday another domino fell as India cut their corporate tax rate to 25%! So why the muted market response to all this?
Central banks
Rates
The first reason is perhaps that central banks are being way too timid. In the US, the Fed cut their rate to the range of 1.75% to 2%. But the US 10-year bond yields just 1.68%, lower than the short term Fed rate. The Fed should have cut much more. Whatever the Fed does, BI should do double. Our rate is 6% or 3x the Fed. BI should have cut 75 points.
Liquidity
The central banks have been behaving oddly in other ways too. The job of the central bank is a simple one. Provide liquidity in the form of currency for the growing economy to use. But the Fed has been withdrawing money from the system by the $bn! Why would they want to do that? Not surprising this ended up causing a cash crunch & last week they had to add liquidity again. They should never have removed it.
FX
Over here we have a similar oddity. The Fed presumably was worried about inflation. Why do central banks worry about inflation when it’s their job to cause it? In Indonesia the similar worry is the value of the currency.... but there’s another department at BI which buys FX reserves. If they got together with the interest rate team, we could have both lower rates & a stronger currency, which would be great for growth.
Imports
Exports
No matter, despite the slowness of both central banks, we do think they’ll catch on eventually & we are starting to see more & more signs of faster growth. The latest data to come out for August is the trade data. For many people the key focus is exports. But exports are in fact for losers. The really interesting number is the imports and we like to see more of them.
Imports
Why are imports the better economic growth signal? Because they represent purchasing power. The strongest economies are the net importers. No surprise then that the signal best correlated with our stock market in $ terms is $ imports. The two have made an almost perfect match for years. As imports haven’t grown since 2011, the stock market has also ended up flat for the last 8 years.
August
After an attempted pick up in demand last year, imports collapsed again into 2019. But after a weak first quarter, imports have started to pick up again & have surged since June. 1Q imports were $40.7m, 2Q barely higher $41.5m. June was lowest of the year, just $11.5k. But July was $15.5m & August $16.8m. We could have a $50m 3Q, which would be a new high for the first time since 2011. Great news!
Sectors
Was
What was fascinating about last week was the internal performance of the stock market. There were sectors which did well & those which did less well & it matched perfectly with our thesis that what has done well for the last 12 years since the Fed last cut rates & what did not do well will now reverse.
Will
What has done well & badly in the last 12 years within the Indonesian stock market? The sectors which have done well are the banks & consumer stocks. The two number 1s have been HMSP & BBCA. Banks have taken over the top 10 as interests went up! What’s done badly has been mining, agriculture & infrastructure including utilities. That’s now going to reverse.
Week
If you’d invested that way last week you’d have made money, good money. The JCI index was down -2% for the week. HMSP had a horrid time, -16% & while BBCA was down a bit, BBRI the number 2 stock was down -3%. On the other side, TLKM was up 3%, AALI was up 4% & INCO was up 5%. We think there’s much more of that to come.
50
People often ask us how do we choose the stocks we cover? The answer is by focusing especially on these sectors. We are now up to 45 stocks under coverage. We have covered 10 palm oil plantations, the 3 main metal mining companies & all the telcos. Recently we’ve been spending a lot of time on infrastructure, cement, toll roads & construction. We will be up to 50 by the end of this week with some truly fascinating stories to follow.
Be a great investor!
Sebastian
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