Director, Head of Research, Smartkarma

Pranav Rao

Director, Head of Research

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

Equity Bottom-Up

Jacobio Pharmaceuticals / Equity Bottom-Up

<ul>
<li>Welcome to Curator’s Cut - a fortnightly roundup of standout themes from the 1,100+ insights shared on Smartkarma.</li>
<li>In this cut, we look at optics as a bottleneck in AI infrastructure, the arguments against Indonesia even with low positioning, and some opportunities within Asian healthcare. </li>
<li>Want to dig deeper? Comment or message with the themes you’d like to see highlighted next.</li>
</ul>


Welcome to Curator’s Cut - a fortnightly roundup of standout themes from the 1,100+ insights shared on Smartkarma.
In this cut, we look at optics as a bottleneck in AI infrastructure, the arguments against Indonesia even with low positioning, and some opportunities within Asian healthcare. 
Want to dig deeper? Comment or message with the themes you’d like to see highlighted next.


Curator's Cut: Seeing the Light in AI, Indonesia at Record Lows & Offbeat Ideas in Asia Healthcare

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

With the current account in surplus in 2H 2020, and inflation below BI's 2-4% target for 9 months, we expect the policy rate to decline by 50bp over the next half year, spurring a strong above-consensus rebound to 6.7% real GDP growth. Structural reforms that have made the labour-market more flexible and created an equity-funded vehicle to expedite infrastructure investment, will contribute to the economic acceleration, as will the spill-over from 2020's unspent fiscal stimulus, and this year's continued fiscal accommodation. With inflation well below BI's agreed target range of 2-4% for 9 consecutive months (and the real policy rate above +2% for the past 10 months), we expect BI to cut its policy rate by 25bp each in the next two quarters, to an all-time low of 3% by September 2021. This will spur a strong economic rebound. Aided by the low-base effect (especially in 2Q), we expect Indonesia's real GDP to accelerate to 6.7% growth in 2021. In 1Q 2021, real GDP is likely to have grown 4.5% YoY, led by a strong export rebound, but a sharp acceleration is likely in the rest of 2021, with the past year's structural reforms also helping.  Those reforms have substantially reduced the severance compensation employers are required to pay laid-off employees, thereby making the labour-market much more flexible, and aiding Pres. Jokowi's job creation agenda, which depends crucially on spurring FDI inflows. With the current account in surplus during 2H 2020, and FDI inflows up 5.5% YoY, foreign reserves have rebounded in the past 3 months (to US$138.8 billion, or 10 months import cover). While there will still be some downward pressure on the IDR when interest rates decline (given the large proportion of foreign ownership of local bonds), mild depreciation in the early stages of an economic recovery is unlikely to deter BI. The 7-day moving average of new Covid cases peaked at a 7-day moving average of 12,476 on 2nd February and has since moderated to 5174 by 27 March 2021, allowing the economy to resume functioning more normally. Large fiscal packages worth an additional 4.4% of GDP were announced last year, after the constitutional ceiling on annual fiscal deficits was temporarily raised (from 3% of GDP). But past experience suggests that actual spending will spill-over into 1H 2021 (even with the deficit for this year programmed to decline to 5.9% of GDP, and the extra spending cut to 2.1% of GDP). The Nusantara Investment Authority (NIA), created as part of the structural reforms and funded mainly by foreign, private and government equity (rather than debt) will contribute to accelerating the pace of infrastructure investment.  With the economy likely to grow much faster than consensus expectations, we are bullish on Indonesian equities, particularly large banks like <a href="https://www.smartkarma.com/entities/bank-central-asia-tbk-pt" target="_blank" data-smartkarma-citation="entities:440:1" rel="noopener">Bank Central Asia (BBCA IJ)</a>.

With the current account in surplus in 2H 2020, and inflation below BI's 2-4% target for 9 months, we expect the policy rate to decline by 50bp over the next half year, spurring a strong above-consensus rebound to 6.7% real GDP growth. Structural reforms that have made the labour-market more flexible and created an equity-funded vehicle to expedite infrastructure investment, will contribute to the economic acceleration, as will the spill-over from 2020's unspent fiscal stimulus, and this year's continued fiscal accommodation. With inflation well below BI's agreed target range of 2-4% for 9 consecutive months (and the real policy rate above +2% for the past 10 months), we expect BI to cut its policy rate by 25bp each in the next two quarters, to an all-time low of 3% by September 2021. This will spur a strong economic rebound. Aided by the low-base effect (especially in 2Q), we expect Indonesia's real GDP to accelerate to 6.7% growth in 2021. In 1Q 2021, real GDP is likely to have grown 4.5% YoY, led by a strong export rebound, but a sharp acceleration is likely in the rest of 2021, with the past year's structural reforms also helping.  Those reforms have substantially reduced the severance compensation employers are required to pay laid-off employees, thereby making the labour-market much more flexible, and aiding Pres. Jokowi's job creation agenda, which depends crucially on spurring FDI inflows. With the current account in surplus during 2H 2020, and FDI inflows up 5.5% YoY, foreign reserves have rebounded in the past 3 months (to US$138.8 billion, or 10 months import cover). While there will still be some downward pressure on the IDR when interest rates decline (given the large proportion of foreign ownership of local bonds), mild depreciation in the early stages of an economic recovery is unlikely to deter BI. The 7-day moving average of new Covid cases peaked at a 7-day moving average of 12,476 on 2nd February and has since moderated to 5174 by 27 March 2021, allowing the economy to resume functioning more normally. Large fiscal packages worth an additional 4.4% of GDP were announced last year, after the constitutional ceiling on annual fiscal deficits was temporarily raised (from 3% of GDP). But past experience suggests that actual spending will spill-over into 1H 2021 (even with the deficit for this year programmed to decline to 5.9% of GDP, and the extra spending cut to 2.1% of GDP). The Nusantara Investment Authority (NIA), created as part of the structural reforms and funded mainly by foreign, private and government equity (rather than debt) will contribute to accelerating the pace of infrastructure investment.  With the economy likely to grow much faster than consensus expectations, we are bullish on Indonesian equities, particularly large banks like Bank Central Asia (BBCA IJ). 

Indonesia: More Rate Cuts to Spur Recovery After Recent Structural Reform

BI cut its policy rate 25bp to 4% on Thursday (16 July), completing 100bp of cuts in 2020. But with inflation at 1.96% YoY in June, the real policy rate remains well above its 4-year average, and we expect another 50bp of rate cuts by October 2020. Although 2Q 2020 is likely to see a contraction in real GDP of 3% (implying a stagnant economy in 1H 2020), the monetary stimulus should allow a modest economic recovery from the current quarter. We expect another 50bp of rate cuts by October, which should allow the economy to accelerate in 4Q 2020, delivering 1.5% real GDP growth for the year (well ahead of the ADB forecast of a contraction of 1% in 2020). Exports rebounded to 2.3% YoY growth in June 2020, after 3 months of contraction during the Covid-induced movement restrictions and lockdown from late-March through May: exports contracted 29.5% YoY in May. Indonesia, like the rest of East Asia, suffered a year-long period of export contraction in November 2018-November 2019, and the nascent recovery over the next 3 months had been snuffed out by Covid. That recovery is set to regain momentum now, especially as the medium-term trend of export-relocation from China gathers pace. With exports (-5.5% YoY) strongly outpacing imports (-14.3% YoY), there was a trade surplus of US$5.5 billion in 1H 2020. This has enabled the IDR to rebound strongly from the massive sell-off in EM currencies during the March 2020 panic. We expect the trade surplus to widen further in 3Q 2020, giving additional room for manoeuvre to Bank Indonesia. Indonesia has not yet decisively defeated the Covid-19 outbreak, as new daily cases continue to climb. However, Indonesia has learnt how to cope better with the Coronavirus without further disruptions to the economy. The prospect of further declines in interest rates will be positive for the equity market, and particularly for <a href="https://www.smartkarma.com/entities/bank-central-asia-tbk-pt" target="_blank" data-smartkarma-citation="entities:440:1" rel="noopener">Bank Central Asia (BBCA IJ)</a> and <a href="https://www.smartkarma.com/entities/bank-mandiri-persero-tbk-pt" target="_blank" data-smartkarma-citation="entities:441:1" rel="noopener">Bank Mandiri Persero (BMRI IJ). </a>

BI cut its policy rate 25bp to 4% on Thursday (16 July), completing 100bp of cuts in 2020. But with inflation at 1.96% YoY in June, the real policy rate remains well above its 4-year average, and we expect another 50bp of rate cuts by October 2020. Although 2Q 2020 is likely to see a contraction in real GDP of 3% (implying a stagnant economy in 1H 2020), the monetary stimulus should allow a modest economic recovery from the current quarter. We expect another 50bp of rate cuts by October, which should allow the economy to accelerate in 4Q 2020, delivering 1.5% real GDP growth for the year (well ahead of the ADB forecast of a contraction of 1% in 2020). Exports rebounded to 2.3% YoY growth in June 2020, after 3 months of contraction during the Covid-induced movement restrictions and lockdown from late-March through May: exports contracted 29.5% YoY in May. Indonesia, like the rest of East Asia, suffered a year-long period of export contraction in November 2018-November 2019, and the nascent recovery over the next 3 months had been snuffed out by Covid. That recovery is set to regain momentum now, especially as the medium-term trend of export-relocation from China gathers pace. With exports (-5.5% YoY) strongly outpacing imports (-14.3% YoY), there was a trade surplus of US$5.5 billion in 1H 2020. This has enabled the IDR to rebound strongly from the massive sell-off in EM currencies during the March 2020 panic. We expect the trade surplus to widen further in 3Q 2020, giving additional room for manoeuvre to Bank Indonesia. Indonesia has not yet decisively defeated the Covid-19 outbreak, as new daily cases continue to climb. However, Indonesia has learnt how to cope better with the Coronavirus without further disruptions to the economy. The prospect of further declines in interest rates will be positive for the equity market, and particularly for Bank Central Asia (BBCA IJ) and Bank Mandiri Persero (BMRI IJ). 

Indonesia: Another 50bp of Rate Cuts by October Will Spur 2H 2020 Recovery

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Thematic (Sector/Industry)

* Pay Me To Take Your Assets: Yesterday, US West Texas Intermediate (WTI) crude futures closed at a negative USD 37.63 per barrel (bbl) [yes, negative] on what appears to be retail driven margin calls (where selling  accelerated into the close)  - this after the Chicago Mercantile Exchange (CME.US) [CME] agreed to allow contract prices to go negative; and  *High Yield/CLO Risk About to Hit The Fan: For the high yield market, there looks to be over USD 200 bn of non-investment grade energy debt with the principal problem residing in the “B3/CCC” leveraged loan market.

* Pay Me To Take Your Assets: Yesterday, US West Texas Intermediate (WTI) crude futures closed at a negative USD 37.63 per barrel (bbl) [yes, negative] on what appears to be retail driven margin calls (where selling  accelerated into the close)  - this after the Chicago Mercantile Exchange (CME.US) [CME] agreed to allow contract prices to go negative; and  *High Yield/CLO Risk About to Hit The Fan: For the high yield market, there looks to be over USD 200 bn of non-investment grade energy debt with the principal problem residing in the “B3/CCC” leveraged loan market.

Indonesia Political Risk Analyst

Kevin O’Rourke

Health: Quarantining Java – i.e., suspending travel between it and other islands – still has yet to receive consideration by policymakers in public discussions.  Relative to closing the highly porous provincial borders of Jakarta, a Java cordon would be eminently feasible.  Infection rates on Java are far higher than elsewhere; if other regions aggressively test‑trace‑and‑isolate their few cases, a worst case might be avoidable.  Papua announced its own ban on inbound air‑and‑sea passenger vessels (Sriwijaya Air is complying) – but Home Affairs Minister Tito Karnavian denounced it.  A Central Java town is also blocking roads.  Last week, President Widodo put controls on a positive track by forming the Covid Task Force and securing 150,000 fast‑test kits.  But he now risks an epic blunder by neglecting to simply suspend, or at least restrict, passenger travel out of Java (Page 2). The central government is cooperating extensively and constructively with Chinese officials and companies to procure materials – especially fast‑test kits.  When used in conjunction with the slower but more accurate polymerase chain reaction (PCR) tests, the serological fast tests are finally providing authorities with the illuminating data needed to act against the invisible pathogen.  Certain regional heads (notably West Java’s Governor Ridwan Kamil) immediately used the new kits to screen health‑care and ‘front‑line’ workers, who will in turn screen exposed groups and at‑risk communities.  Kamil will also do mass testing via Korean‑style drive‑throughs (but with motorcycles).  If Widodo would compel other regions to emulate this approach, a flattening of the curve might yet be pos­sible.  Presidential decisions in the days ahead will affect the fates of millions (p. 7). Politics: The new the National Mandate Party (Pan) roster omits Amien Rais (p. 11).Regional Elections: Postponement of September’s 270 regional‑head contests is likely, but not yet definite (p. 12). Policy News: The finance minister signaled her willingness to relax the statutory three‑percent fiscal deficit limit, as the president intends to revise the budget to focus on Covid‑19.  Parliamentarians suggest a permanent change to five percent, but a one-time relax­ation, perhaps via a decree-in-lieu-of-law (perppu), might pose less risk over the longer term (p. 13).  Income assistance for vulnerable groups will expand in scope (p. 13).Economics: The rupiah sank to Rp16,600 per USD before rallying modestly (p. 14).Justice: The trial of police charged with hurling acid on corruption investigator Novel Baswedan is unlikely to shed light on who ordered the attack (p. 14).

Health: Quarantining Java – i.e., suspending travel between it and other islands – still has yet to receive consideration by policymakers in public discussions.  Relative to closing the highly porous provincial borders of Jakarta, a Java cordon would be eminently feasible.  Infection rates on Java are far higher than elsewhere; if other regions aggressively test‑trace‑and‑isolate their few cases, a worst case might be avoidable.  Papua announced its own ban on inbound air‑and‑sea passenger vessels (Sriwijaya Air is complying) – but Home Affairs Minister Tito Karnavian denounced it.  A Central Java town is also blocking roads.  Last week, President Widodo put controls on a positive track by forming the Covid Task Force and securing 150,000 fast‑test kits.  But he now risks an epic blunder by neglecting to simply suspend, or at least restrict, passenger travel out of Java (Page 2). The central government is cooperating extensively and constructively with Chinese officials and companies to procure materials – especially fast‑test kits.  When used in conjunction with the slower but more accurate polymerase chain reaction (PCR) tests, the serological fast tests are finally providing authorities with the illuminating data needed to act against the invisible pathogen.  Certain regional heads (notably West Java’s Governor Ridwan Kamil) immediately used the new kits to screen health‑care and ‘front‑line’ workers, who will in turn screen exposed groups and at‑risk communities.  Kamil will also do mass testing via Korean‑style drive‑throughs (but with motorcycles).  If Widodo would compel other regions to emulate this approach, a flattening of the curve might yet be pos­sible.  Presidential decisions in the days ahead will affect the fates of millions (p. 7). Politics: The new the National Mandate Party (Pan) roster omits Amien Rais (p. 11).Regional Elections: Postponement of September’s 270 regional‑head contests is likely, but not yet definite (p. 12). Policy News: The finance minister signaled her willingness to relax the statutory three‑percent fiscal deficit limit, as the president intends to revise the budget to focus on Covid‑19.  Parliamentarians suggest a permanent change to five percent, but a one-time relax­ation, perhaps via a decree-in-lieu-of-law (perppu), might pose less risk over the longer term (p. 13).  Income assistance for vulnerable groups will expand in scope (p. 13).Economics: The rupiah sank to Rp16,600 per USD before rallying modestly (p. 14).Justice: The trial of police charged with hurling acid on corruption investigator Novel Baswedan is unlikely to shed light on who ordered the attack (p. 14). 

Start of Systematic Screening Provides Hope, but Widodo Has Yet to Cordon Java

Indonesia

iShares MSCI Indonesia ETF is an exchange-traded fund incorporated in the USA. The ETF seeks investment results that correspond to the performance of the MSCI Indonesia Investable Market Index.

iShares MSCI Indonesia ETF (EIDO US)

Curator's Cut: Seeing the Light in AI, Indonesia at Record Lows & Offbeat Ideas in Asia Healthcare

Discover standout themes in AI infrastructure, Indonesia's challenges, and Asian healthcare opportunities in this Curator's Cut issue. Share your...

Pranav Rao

Indonesia: More Rate Cuts to Spur Recovery After Recent Structural Reform

With inflation below BI's 2-4% target for 9 months, we expect 50bp of further rate cuts. That, coupled with fiscal stimulus & structural reform,...

Prasenjit K. Basu

Indonesia: Another 50bp of Rate Cuts by October Will Spur 2H 2020 Recovery

BI cut its policy rate 25bp to 4% on Thursday (16 July), completing 100bp of cuts in 2020. But with inflation at 1.96% YoY in June, the real policy...

Prasenjit K. Basu

Houston, We Have A Problem

* Pay Me To Take Your Assets: Yesterday, US West Texas Intermediate (WTI) crude futures closed at a negative USD 37.63 per barrel (bbl) [yes,...

Thomas J. Monaco

Start of Systematic Screening Provides Hope, but Widodo Has Yet to Cordon Java

Health: Quarantining Java – i.e., suspending travel between it and other islands – still has yet to receive consideration by policymakers in public...

Kevin O’Rourke

Curator's Cut: Seeing the Light in AI, Indonesia at Record Lows & Offbeat Ideas in Asia Healthcare

​Discover standout themes in AI infrastructure, Indonesia's challenges, and Asian healthcare opportunities in this Curator's Cut issue. Share your...

Pranav Rao

Indonesia: More Rate Cuts to Spur Recovery After Recent Structural Reform

With inflation below BI's 2-4% target for 9 months, we expect 50bp of further rate cuts. That, coupled with fiscal stimulus & structural reform,...

Prasenjit K. Basu

Indonesia: Another 50bp of Rate Cuts by October Will Spur 2H 2020 Recovery

BI cut its policy rate 25bp to 4% on Thursday (16 July), completing 100bp of cuts in 2020. But with inflation at 1.96% YoY in June, the real policy...

Prasenjit K. Basu

Houston, We Have A Problem

* Pay Me To Take Your Assets: Yesterday, US West Texas Intermediate (WTI) crude futures closed at a negative USD 37.63 per barrel (bbl) [yes,...

Thomas J. Monaco

Start of Systematic Screening Provides Hope, but Widodo Has Yet to Cordon Java

Health: Quarantining Java – i.e., suspending travel between it and other islands – still has yet to receive consideration by policymakers in public...

Kevin O’Rourke

Discover standout themes in AI infrastructure, Indonesia's challenges, and Asian healthcare opportunities in this Curator's Cut issue. Share your...