2024 Macro Letter

Heading Out of the Storm, into another Storm?

• In 2023, major economies faced rising inflation due to strong post-COVID demand, supply disruptions, and geopolitical conflicts, exerting pressure on central banks to raise interest rates, reminiscent of the 1970s.

• Despite signals of a potential "higher for longer" rate environment, concerns over a growth slowdown or recession loom, especially in Europe, the UK, and China, reflecting ongoing economic uncertainties.

• Geopolitical tensions, such as conflicts in the Middle East and Ukraine, further complicate economic landscapes, posing challenges for central banks to navigate stability without stoking inflation, thereby adding another layer of complexity to global economic dynamics.

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Indonesian Presidential Election and Avoiding the Middle Income Trap

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• Indonesia's upcoming 2024 presidential election sees the Prabowo-Gibran coalition leading the polls and poised to continue Joko Widodo's legacy, despite concerns over the establishment of a political dynasty. We think economic hopes pinned on a surge in voter confidence and consumption may be dampened should we see a runoff election, potentially impacting business activity.

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• Indonesia faces the challenge of avoiding a middle-income trap despite its growing economy and young demographics. While positive momentum exists, structural reforms addressing issues like rule of law, anti-corruption measures, education, and financial market deepening are essential to sustain growth and prevent stagnation.

Impact to Simpan Portfolios

• With expectations of US interest rates falling faster than that of Bank Indonesia’s benchmark rate, the yield disparities across US Treasury Yields and Indonesian Sovereign Bond Yields are critical indicators influencing our decisions. 
• We think that the stability of the Indonesian Rupiah is a key factor for the stability of the overall bond market as measures are required to mitigate the risks associated with capital outflows. By order of preference, there is still positive sentiment over US Treasuries given Fed cuts in 2024, followed by short-duration IDR government bonds vs. long-duration IDR government bonds.
• Within Equities, we anticipate a slowdown in economic activity and company earnings growth. However, we expect a more favourable interest rate environment that could potentially boost equity indexes, leading to company-specific multiple expansion.
• We also acknowledge that select stocks have driven the index up. As such, we are taking a tactical approach when overweighting equities and focusing on companies with strong competitive advantage, high profit margins and a robust balance sheet. 

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Read the full report here.

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Information & Disclosures

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