Indonesia

In this briefing:

1. The Week that Was in ASEAN@Smartkarma – Elections, Trade War Beneficiaries, and Indonesian Textiles
2. Bull Or Bear? Latest Global Liquidity Readings
3. Risk of Future LNG Supply Glut as Bubble of New Projects Grows
4. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate
5. Vietnam Picks up the China Baton

1. The Week that Was in ASEAN@Smartkarma – Elections, Trade War Beneficiaries, and Indonesian Textiles

Macro Insights

In Prayuth Accomplishes a Clear-Cut Victory, Assuring Stability (If Not Rapid Growth), CrossASEAN Insight Provider Prasenjit K. Basu comments on the result of the recent election in Thailand. 

In Thai Election 2019: Defeat in Parliament, Victory in Senate, Thai Guru Athaporn Arayasantiparb, CFA comments on the results on the Thai elections and the consequences for decision making in that country. 

In a follow-up Insight on the recent election in Thailand, Political Pit Stop (April): An Election Gridlock, Athaporn Arayasantiparb, CFA deals with some unfinished business post the election.

In Elections, Coups and Constitutions: Thailand’s Reckoning, Dr. Jim Walker looks at Thailand’s political history with the recent election in mind and concludes that Thai politics looks set to become fractious and interesting once again. 

In his insight, 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate, Kevin O’Rourke looks and the most important political and economic developments over the past week and provides his value-added comment. 

In Vietnam Picks up the China Baton, Dr. Jim Walker lays out his thoughts on which countries are set to benefit the most from the ongoing trade dispute between the US and China. Indonesia and Vietnam would seem to be the most obvious beneficiaries.  

Equity Bottom-Up Insights

In his most recent on-the-ground insight, Shaky Situations at DEMCO and Pranda, Athaporn Arayasantiparb, CFA lays out his thoughts post visits to two companies with very different trajectories, namely renewable power specialist Demco Pcl (DEMCO TB), which is struggling, despite doing really well in the past and jeweller Pranda Jewelry Pub (PRANDA TB), once struggling but now on a recovery path. 

In Golden Agri Bull Pivots to Get Involved, technical specialist Thomas Schroeder works his magic on this leading Singapore listed plantation company.

For a fundamental view on the above situations please refer to last week’s insight, Golden Agri: El Nino Back on the Front Burner; Bullish Catalyst for GAR, from commodities specialist Charles Spencer who zeros on the potential positive impact from an impending El Nino event on Golden Agri Resources (GGR SP). 

Sector and Thematic Insights

In Small Cap Diary: Rajthanee Hospital, CAZ, Athaporn Arayasantiparb, CFA lays out his thoughts post visits to these two small-cap companies from totally different industries Rajthanee Hospital (RJH TB) and CAZ Thailand PCL (CAZ TB). 

2. Bull Or Bear? Latest Global Liquidity Readings

• Global Liquidity bottoming out, but Central Banks not yet easing
• US Fed only withdrew $30bn in Q1, versus $350 bn in Q4
• PBoC still tightening through OMOs
• ECB  on ‘pause’
• QE4 is coming in 2019, but no evidence it has started yet

3. Risk of Future LNG Supply Glut as Bubble of New Projects Grows

The rapidly improving outlook in the LNG industry over the last few years, reinforced towards the end of 2017 by the unexpected growth of demand from China, has set off a proliferation of new LNG projects especially from the US (Exhibit 1).

In its latest LNG Outlook report, Royal Dutch Shell (RDSA LN) is projecting from 2023 onwards a significant gap between the future LNG demand and the existing supply including the capacity under construction that could require up to 100mtpa of new LNG project sanctions by 2023.

The race to gain market share in the projected LNG demand-supply gap has produced an aggregated capacity of proposed new projects of up to 475mtpa, a number larger than the total LNG traded volume in 2018 of 319mtpa and way above the capacity required to meet the future growth in LNG demand.

Exhibit 1: Funnel of proposed LNG projects getting bigger

4. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate

Two new and credible polls show Widodo leading by margins of 18-19 percentage points over Prabowo.  This mitigates — but does not entirely eliminate — risks surrounding the 17 April election outlook.  Polls show PDI-P and Gerindra gaining at the expense of Islamic parties.  The 4th debate on 30 March could help Prabowo draw slightly closer.  The planned US$400 million relocation of a textile plant from China to Central Java bodes well, but whether central government policies are supportive remains to be seen.  Two SOEs are under corruption scrutiny: Krakatau Steel Persero Tbk (KRAS IJ) and Pupuk Indonesia.  A reasonable MRT tariff is in place.

Politics: Coordinating Security Minister Wiranto threatened to invoke the Terrorism Law on those who advocate abstaining on election day.  He may believe that high turnout will benefit President Joko Widodo – but the draconian threat will harm Widodo’s image more than it helps (Page 2).  The next presidential debate on 30 March will likely feature discussion of Widodo’s proposal to place active military officers in civilian bureaucratic posts (Page 2).  Vice‑presidential nominee Sandiaga Uno promised fisheries operators that he and Prabowo Subianto would overturn a ban on dragnet trawling (p. 4).  Constitutional Court justices will prioritize the resolution of legislative election disputes (p. 5). 

Surveys: With less than three weeks remaining until the 17 April election day, two more new polls show the lead for President Joko Widodo remains intact.  A poll by the Center for Strategic and International Studies (CSIS) took place from 15-22 March; it shows Widodo ahead by 18 percentage points, with 15 percent undecided.  Similarly, a poll by Charta Politik showed Widodo leading by 19 points; it also implies that Islamic and Islamic‑oriented parties will shrink by a third on aggregate.  Both polls indicate that the reform‑minded Solidarity Party (PSI) is unlikely to pass the four‑percent threshold required to occupy parliamentary seats; incumbent parties at risk of falling short are Hanura, the National Mandate Party (Pan) and the United Development Party (PPP) (p. 6). 

Justice: Investigators from the Anti-Corruption Commission (KPK) made arrests in cases involving the state enterprises PT Krakatau Steel Tbk and PT Pupuk (p. 10). 

Jakarta: Policymakers finally decided upon a reasonable tariff for the new Mass Rapid Transit (MRT) – Rp10,000 per 10 kilometers, with a maximum fare of Rp14,000 (p. 11).

Economics: Plans to relocate a sizeable Chinese textile plant in Central Java send a positive signal about manufacturing – but whether central‑government policies will be adequately supportive remains to be seen (p. 12).

Outlook: Plentiful poll data shows that Widodo has a comfortable margin of 55‑60 percent, with few factors likely to alter circumstances in the final three weeks.  But his opponent is brazen and risks therefore exist.  Widodo winning by only a very narrow margin is a scenario with a low probability – but a high potential impact.  Prabowo has a penchant for protesting angrily, hard‑line supporters can inundate Jakarta and the Constitutional Court has a protracted schedule for resolving disputes (its deadline is 8 August) (p. 14). 

5. Vietnam Picks up the China Baton

The US-China trade dispute simmers on. Regardless of the outcome of talks between the two largest economies on earth, the damage to the existing world manufacturing trading order has already been done. China plus one is no longer a preferential industrial location strategy for multinational companies, it is an imperative. Like Brexit, companies are beginning to relocate out of China even before the dispute is either settled or escalated. Profits can’t wait for governments to behave sensibly.

But where to go? Indonesia and Vietnam are the most obvious potential beneficiaries of the fallout from the ongoing trade dispute between the US and China. There are a number of alternatives but Indonesia and Vietnam both have large, youthful working populations (and really here we are talking about the accessible workforces on Java and in Vietnam) and both are located within easy reach of the existing Asian supply chain. But are both equally ready and equally keen to pick up the China baton? Vietnam is the obvious winner in this contest. Unfortunately, for institutional equity investors the market isn’t included in Asia-Pacific or emerging market benchmarks.

In this briefing:

1. Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story
2. China – Eurozone Negative Feedback Loop.
3. The Week that Was in ASEAN@Smartkarma – Asian Currencies, Indonesian Media, and Shopee
4. Blue Bird (BIRD IJ) – Transport Wizzard with a Twist – On the Ground in J-Town

1. Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

Last Friday, Sea Ltd (SE US) unveiled plans to raise around $1 billion (based on the closing price on 28 February) through an underwritten public offering of 50 million ADS. The fundraising was inevitable due to the high cash burn and net cash position.

2. China – Eurozone Negative Feedback Loop.

Historically, Germany and China have depended on exports to lead growth. With the US unwilling to play the role of consumer of last resort and being determined to limit its current account deficit,  this avenue is not available anymore. In the absence of a rethink by German policy makers as to how to make German growth more self -sustaining a deflationary feedback loop is developing between the EU and China. 

3. The Week that Was in ASEAN@Smartkarma – Asian Currencies, Indonesian Media, and Shopee

Macro Insights

In Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near, CrossASEAN Insight Provider Kevin O’Rourke provides his value-added views on political and economic developments in Indonesia over the last week. 

In Asia’s External Balances Signal Safety for Investors, Dr Jim Walker takes a close look at Asian currencies, their performance over the last year and highlights some interesting misperceptions. 

Equity Bottom-Up Insights

In Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA, CrossASEAN Insight provider Nicolas Van Broekhoven revisits Procurri Corporation (PROC SP) and finds an overhang lifted for the stock.  

In Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring, Angus Mackintosh revisits this leading Indonesian media company and finds it on the cusp of a more digital future. 

In Blue Bird (BIRD IJ) – Transport Wizzard with a Twist, Angus Mackintosh revisits Indonesia’s leading taxi company after a meeting with management and comes back with some positive newsflow. 

In Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?, Johannes Salim, CFA circles back to Sea Ltd (SE US) after the post-results call with management. 

In Bank Danamon Goes Ex-Rights, Travis Lundy circles back to the ongoing merger between Bank Danamon Indonesia (BDMN IJ) and Mitsubishi Ufj Financial (8306 JP). 

In BIMB: Market Gives Thumbs-Up to Results, Paul Hollingworth takes a close look at this Malaysian Bank. Bimb Holdings (BIMB MK) or BHB commands two subsidiaries, Bank Islam and Takaful Malaysia.

In Golden Land: Less An Offer, More A Consolidation Of Interests, event-driven specialist David Blennerhassett revisits this ongoing takeover situation. 

In Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision, Royston Foo revisits the company post recent results. 

In SYNEX: New Smartphone Launches Help Drive Earnings Momentum in 2019, our friend at Country Group comment on Synnex Thailand (SYNEX TB) following recent numbers. 

In PRM: Thai Largest Tanker Fleets Assured of Consistent Growth, Country Group initiates coverage on Prima Marine PCL (PRM TB) with a BUY rating. 

Sector and Thematic Insights

In INDO Snippets: Second Presidential Debate, BNLI & PNBN – This Time Is Real?, CrossASEAN Insight provider Jessica Irene provides us with substantive and significant on the ground chatter that may potentially have a meaningful impact on the Indonesian Equity Market. This week she comments on the second presidential debate, Bank Permata (BNLI IJ) stake sale rumours, as well as ANZ’s potential disposal of its stake in Bank Pan Indonesia (PNBN IJ). 

In Jakarta Trip – On the Ground Insight Feb 2019, CrossASEAN Insight Provider Henry Soediarko provides us with his value-added on the ground comments following a trip to Jakarta. 

In Singapore Real Deals (Issue 4): Purpose Built Workers Accommodation, an Alternative Asset Class, Anni Kum puts out her fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In this issue, she examines Singapore’s Purpose Built Workers Accommodation (PBWA) industry landscape in light of the nation’s foreign workforce policy.

4. Blue Bird (BIRD IJ) – Transport Wizzard with a Twist – On the Ground in J-Town

A visit in Jakarta to the Blue Bird (BIRD IJ) office was well-timed as the company is close to the conclusion of two corporate actions, as well as an interesting extension to its relationship with Go-Jek Indonesia (1379371D IJ).

Both acquisitions are synergistic with its existing business and represent long-term opportunities rather than an immediate significant boost to earnings.

The company’s underlying fundamentals continue to improve with fleet utilisation up versus last year in 4Q18, as was the average revenue per taxi.

The company continues to see the benefits of its tie-up with Go-Jek, which will soon morph into something even more significant.

Blue Bird (BIRD IJ) remains an interesting way to play the rising levels of affluence amongst the rising middle classes in Indonesia. the company is close to completing two corporate actions including a new venture into the car auction business with Mitsubishi UFJ and the acquisition of an intercity bus company. It is also close to signing an extension and expansion of its relationship with Go-Jek, which will help to cement its position in the online ride-hailing space. Underlying fundamentals continue to improve both in terms of fleet utilisation and average revenue per taxi. According to Capital IQ consensus, the company trades on  14.9x FY19E PER and 13.7x FY20E PER, with forecast EPS growth of +16.2% and +8.9% for FY19E and FY20E respectively. The near-term completion of two corporate actions and an extension of its agreement with Go-Jek Indonesia (1379371D IJ) should provide positive catalysts for the share price coupled with improving ridership, average revenue per taxi, and fleet utilisation.

In this briefing:

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%. 

In this briefing:

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town
2. Global EM Special: Andean Condors Vs Asian Elephants – Where Is the Growth in EM?
3. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%. 

2. Global EM Special: Andean Condors Vs Asian Elephants – Where Is the Growth in EM?

Global growth is expected to slow over the coming quarters, possibly years – and emerging market economies are certainly not immune from this. Nevertheless, within this diverse universe, the pace of deceleration will be uneven. Whilst some “open” EM economies are generally synchronized with growth dynamics in the rest of the world, others will be shielded by a combination of idiosyncratic forces – including renewed accommodative (monetary and fiscal) policies, cyclical recovery or upswing in domestic growth drivers and – for some – positive political developments and reform progress. Still, other EMs are less fortunate and a growth deceleration is likely to deepen in the near-term – held back by less policy flexibility, political uncertainty and various domestic or external shocks.

With 4Q18 GDP growth reports underway, we sifted through – and synthesized – various growth indicators to introduce a “Growth-Profile Framework” (GPF) to systematically evaluate – and rank – growth profiles in a data-driven, automated and standardized manner. The “GPF” not only takes into account GDP for the most recently-reported four quarters but also forward-looking forecasts and the latest economist revisions, which often take into account the latest data surprises and other material developments.

The observation universe is the “Emerging Markets-25” (EM-25) of large, investable EM countries most often found in benchmark indices such as MSCI EM and JPMorgan (GBI-EM and EMBI) indices. This opportunity set offers a breadth of diversity spanning across Asia, EMEA and LatAm and different stages of development. 

Highlights: 

• Introducing the “EM-25” Growth Profile Framework: This data-driven, automated and standardized model generates a ranking of the “EM-25” economies based on a composite of factors reflecting: 1/ The most recent GDP growth data (in relation to three look-back periods), 2/ Forward-looking consensus growth forecasts (in relation to the most recent four quarters of GDP) and 3/ Upgrades and downgrades to those forecasts.
• Andean condors soar while Asian elephants amble along: LatAm – specifically the Andean economies (plus Brazil) – currently stand out as having the most attractive growth profiles among the EM-25. They are helped by a combination of – largely idiosyncratic – factors ranging from newfound reform optimism (Brazil), improving domestic confidence (Colombia), pent-up domestic demand (Peru) and stabilizing appetite for key commodities (Chile). This contrasts with export-oriented Asian manufacturers that dominate the bottom rankings. Elsewhere, the legacy of past macroeconomic policy choices – both painfully orthodox (Argentina) and otherwise (Turkey, Venezuela, Pakistan) – are taking their unique toll on certain other economies.
• Does growth matter for investment strategy? Yes…: Simplistically speaking, economies with exemplary growth profiles are viable candidates for long or overweight positions in equity markets and external debt. Strong growth is often associated with stronger corporate earnings potential as well as lower debt-to-GDP levels, respectively. Growth implications for FX and local debt are more ambiguous, but to the extent that a robust growth outlook guides central banks to tighten policy or lifts the government’s fiscal revenues over time, then this may also be positive for currencies and rates, respectively.

• …But it’s complicated: However, strong growth can detract asset performance if it is the result of unsustainable policies (e.g. overly loose fiscal or monetary actions) or if it leads to overheating conditions (e.g. runaway inflation or a wider current account deficit). An attractive growth profile, as with all data sets, needs to be judged against its context. Although high and improving growth is an end-goal for many policymakers, the road to strong – and sustainable – growth is far more important for its longevity (and for risk assets over the medium-term). For instance: Are growth prospects improving due to rising productivity (as it might from structural reform)? Or rather from overly-stimulative policies that risk fanning inflation or widening the current account deficit? To what extent do officials have the policy flexibility to stoke growth, smoothen downside growth risks or stave off a recession? We touch upon these questions in the individual country sections below.

• While the narrative is almost always more important than the number itself, this GPF framework nevertheless offers a valuable screening tool that systematically evaluates growth profiles – on a stand-alone and relative basis – across the “EM-25” universe.

3. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near

Sparring remains lively in the presidential campaign, with the Prabowo camp targeting a liability for Widodo: retired generals in the cabinet.  But Prabowo is still campaigning ineffectively and defections of allied governors shows that some in his camp consider his prospects dim.  Police controversially dropped charges against a chief hard-line Islamic figure.  Anti-foreign rhetoric, chiefly from Prabowo, threatens to tug policy discourse towards his vision of barriers, autarky and state control.  Two forthcoming regulations on the property sector aim to safeguard consumers.  A review of geothermal policies is possible.  Upstream energy investment may be improving.  The IA-Cepa may conclude on 4 March.  Adhi Karya’s Jabodebek LRT faces a thorny land problem in Bekasi, where the China-backed fast train project may have complicated matters by overpaying. 

Politics: Campaign sparring continues apace, as Gerindra Chair Prabowo Subianto criticized infrastructure projects (they enable imports to penetrate further) and reiterated that “Rp11,000 trillion in Indonesian assets reside abroad”.  Campaign officials for President Joko Widodo lambasted the remarks and recalled that both Prabowo and his running mate appeared in the ‘Panama Papers’.  Meanwhile, retired generals from the rival campaigns exchanged jabs about events of May 1998; for Prabowo, the topic contains pitfalls (Page 2).  In a rare example of violence in election campaigning, a fracas outside a rally in Yogyakarta caused three minor injuries among rival youth groups (p. 4).  Elite endorsements matter little, but Widodo has garnered overwhelming support from regional heads (p. 4).  Police controversially dropped charges on hard‑line Islamic leader Slamet Ma’arif (p. 5).  Agus Harimurti Yudhoyono (AHY) takes over Partai Demokrat’s campaigning as Susilo Bambang Yudhoyono attends to his ill spouse (p. 6). 

Surveys: A newly released poll from the Cyrus Network shows Widodo’s lead intact – but the actual data is from mid‑January, a period that other polls already covered (p. 6). 

Policy News: Coordinating Maritime Affairs Minister Lt Gen (ret) Luhut Panjaitan urged greater state investment in geothermal power (p. 7).  Protecting consumers from misleading practices by property developers will reportedly be the focus of two forth­coming regulations (p. 8).  The IA-Cepa is reportedly due for signing on 4 March (p. 9).

Infrastructure: The Jakarta Mass Rapid Transit (MRT) will ramp up operations during a trial from 12-24 March, with commercial operations expected by end‑March (p. 9).  Press reports hint that the China‑financed Bandung fast train project may have overpaid for land in Bekasi, thereby complicating acquisition of nearby land needed for the Jakarta-Area Light Rail Train (LRT) project, which faces delay until April 2021 (p. 9). 

Economics: The trade minister touted FTAs (p. 11).  Upstream Regulatory Agency (SKK Migas) officials expressed optimism about investment flows into oil and gas (p. 12). 

Outlook: Although the winner is not yet clear, the loser thus far in the presidential election appears to be the international community.  Pronounced anti‑foreign rhetoric from the Prabowo camp threatens to cow policy­makers and jeopardize prudent economic management.  Excessive skepticism of international engagement would come at an awkward time: the current account deficit requires capital inflows, while protectionism would augur lower growth (p. 12). 

In this briefing:

1. Bull Or Bear? Latest Global Liquidity Readings
2. Risk of Future LNG Supply Glut as Bubble of New Projects Grows
3. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate
4. Vietnam Picks up the China Baton
5. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished

1. Bull Or Bear? Latest Global Liquidity Readings

• Global Liquidity bottoming out, but Central Banks not yet easing
• US Fed only withdrew $30bn in Q1, versus $350 bn in Q4
• PBoC still tightening through OMOs
• ECB  on ‘pause’
• QE4 is coming in 2019, but no evidence it has started yet

2. Risk of Future LNG Supply Glut as Bubble of New Projects Grows

The rapidly improving outlook in the LNG industry over the last few years, reinforced towards the end of 2017 by the unexpected growth of demand from China, has set off a proliferation of new LNG projects especially from the US (Exhibit 1).

In its latest LNG Outlook report, Royal Dutch Shell (RDSA LN) is projecting from 2023 onwards a significant gap between the future LNG demand and the existing supply including the capacity under construction that could require up to 100mtpa of new LNG project sanctions by 2023.

The race to gain market share in the projected LNG demand-supply gap has produced an aggregated capacity of proposed new projects of up to 475mtpa, a number larger than the total LNG traded volume in 2018 of 319mtpa and way above the capacity required to meet the future growth in LNG demand.

Exhibit 1: Funnel of proposed LNG projects getting bigger

3. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate

Two new and credible polls show Widodo leading by margins of 18-19 percentage points over Prabowo.  This mitigates — but does not entirely eliminate — risks surrounding the 17 April election outlook.  Polls show PDI-P and Gerindra gaining at the expense of Islamic parties.  The 4th debate on 30 March could help Prabowo draw slightly closer.  The planned US$400 million relocation of a textile plant from China to Central Java bodes well, but whether central government policies are supportive remains to be seen.  Two SOEs are under corruption scrutiny: Krakatau Steel Persero Tbk (KRAS IJ) and Pupuk Indonesia.  A reasonable MRT tariff is in place.

Politics: Coordinating Security Minister Wiranto threatened to invoke the Terrorism Law on those who advocate abstaining on election day.  He may believe that high turnout will benefit President Joko Widodo – but the draconian threat will harm Widodo’s image more than it helps (Page 2).  The next presidential debate on 30 March will likely feature discussion of Widodo’s proposal to place active military officers in civilian bureaucratic posts (Page 2).  Vice‑presidential nominee Sandiaga Uno promised fisheries operators that he and Prabowo Subianto would overturn a ban on dragnet trawling (p. 4).  Constitutional Court justices will prioritize the resolution of legislative election disputes (p. 5). 

Surveys: With less than three weeks remaining until the 17 April election day, two more new polls show the lead for President Joko Widodo remains intact.  A poll by the Center for Strategic and International Studies (CSIS) took place from 15-22 March; it shows Widodo ahead by 18 percentage points, with 15 percent undecided.  Similarly, a poll by Charta Politik showed Widodo leading by 19 points; it also implies that Islamic and Islamic‑oriented parties will shrink by a third on aggregate.  Both polls indicate that the reform‑minded Solidarity Party (PSI) is unlikely to pass the four‑percent threshold required to occupy parliamentary seats; incumbent parties at risk of falling short are Hanura, the National Mandate Party (Pan) and the United Development Party (PPP) (p. 6). 

Justice: Investigators from the Anti-Corruption Commission (KPK) made arrests in cases involving the state enterprises PT Krakatau Steel Tbk and PT Pupuk (p. 10). 

Jakarta: Policymakers finally decided upon a reasonable tariff for the new Mass Rapid Transit (MRT) – Rp10,000 per 10 kilometers, with a maximum fare of Rp14,000 (p. 11).

Economics: Plans to relocate a sizeable Chinese textile plant in Central Java send a positive signal about manufacturing – but whether central‑government policies will be adequately supportive remains to be seen (p. 12).

Outlook: Plentiful poll data shows that Widodo has a comfortable margin of 55‑60 percent, with few factors likely to alter circumstances in the final three weeks.  But his opponent is brazen and risks therefore exist.  Widodo winning by only a very narrow margin is a scenario with a low probability – but a high potential impact.  Prabowo has a penchant for protesting angrily, hard‑line supporters can inundate Jakarta and the Constitutional Court has a protracted schedule for resolving disputes (its deadline is 8 August) (p. 14). 

4. Vietnam Picks up the China Baton

The US-China trade dispute simmers on. Regardless of the outcome of talks between the two largest economies on earth, the damage to the existing world manufacturing trading order has already been done. China plus one is no longer a preferential industrial location strategy for multinational companies, it is an imperative. Like Brexit, companies are beginning to relocate out of China even before the dispute is either settled or escalated. Profits can’t wait for governments to behave sensibly.

But where to go? Indonesia and Vietnam are the most obvious potential beneficiaries of the fallout from the ongoing trade dispute between the US and China. There are a number of alternatives but Indonesia and Vietnam both have large, youthful working populations (and really here we are talking about the accessible workforces on Java and in Vietnam) and both are located within easy reach of the existing Asian supply chain. But are both equally ready and equally keen to pick up the China baton? Vietnam is the obvious winner in this contest. Unfortunately, for institutional equity investors the market isn’t included in Asia-Pacific or emerging market benchmarks.

5. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished

• The dollar IS the story
• EUR punished for negative yields
• Chasing Brexit down a rabbit hole
• Gold confounds
• Bitcoin at an interesting juncture

The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.

In this briefing:

1. Global EM Special: Andean Condors Vs Asian Elephants – Where Is the Growth in EM?
2. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near

1. Global EM Special: Andean Condors Vs Asian Elephants – Where Is the Growth in EM?

Global growth is expected to slow over the coming quarters, possibly years – and emerging market economies are certainly not immune from this. Nevertheless, within this diverse universe, the pace of deceleration will be uneven. Whilst some “open” EM economies are generally synchronized with growth dynamics in the rest of the world, others will be shielded by a combination of idiosyncratic forces – including renewed accommodative (monetary and fiscal) policies, cyclical recovery or upswing in domestic growth drivers and – for some – positive political developments and reform progress. Still, other EMs are less fortunate and a growth deceleration is likely to deepen in the near-term – held back by less policy flexibility, political uncertainty and various domestic or external shocks.

With 4Q18 GDP growth reports underway, we sifted through – and synthesized – various growth indicators to introduce a “Growth-Profile Framework” (GPF) to systematically evaluate – and rank – growth profiles in a data-driven, automated and standardized manner. The “GPF” not only takes into account GDP for the most recently-reported four quarters but also forward-looking forecasts and the latest economist revisions, which often take into account the latest data surprises and other material developments.

The observation universe is the “Emerging Markets-25” (EM-25) of large, investable EM countries most often found in benchmark indices such as MSCI EM and JPMorgan (GBI-EM and EMBI) indices. This opportunity set offers a breadth of diversity spanning across Asia, EMEA and LatAm and different stages of development. 

Highlights: 

• Introducing the “EM-25” Growth Profile Framework: This data-driven, automated and standardized model generates a ranking of the “EM-25” economies based on a composite of factors reflecting: 1/ The most recent GDP growth data (in relation to three look-back periods), 2/ Forward-looking consensus growth forecasts (in relation to the most recent four quarters of GDP) and 3/ Upgrades and downgrades to those forecasts.
• Andean condors soar while Asian elephants amble along: LatAm – specifically the Andean economies (plus Brazil) – currently stand out as having the most attractive growth profiles among the EM-25. They are helped by a combination of – largely idiosyncratic – factors ranging from newfound reform optimism (Brazil), improving domestic confidence (Colombia), pent-up domestic demand (Peru) and stabilizing appetite for key commodities (Chile). This contrasts with export-oriented Asian manufacturers that dominate the bottom rankings. Elsewhere, the legacy of past macroeconomic policy choices – both painfully orthodox (Argentina) and otherwise (Turkey, Venezuela, Pakistan) – are taking their unique toll on certain other economies.
• Does growth matter for investment strategy? Yes…: Simplistically speaking, economies with exemplary growth profiles are viable candidates for long or overweight positions in equity markets and external debt. Strong growth is often associated with stronger corporate earnings potential as well as lower debt-to-GDP levels, respectively. Growth implications for FX and local debt are more ambiguous, but to the extent that a robust growth outlook guides central banks to tighten policy or lifts the government’s fiscal revenues over time, then this may also be positive for currencies and rates, respectively.

• …But it’s complicated: However, strong growth can detract asset performance if it is the result of unsustainable policies (e.g. overly loose fiscal or monetary actions) or if it leads to overheating conditions (e.g. runaway inflation or a wider current account deficit). An attractive growth profile, as with all data sets, needs to be judged against its context. Although high and improving growth is an end-goal for many policymakers, the road to strong – and sustainable – growth is far more important for its longevity (and for risk assets over the medium-term). For instance: Are growth prospects improving due to rising productivity (as it might from structural reform)? Or rather from overly-stimulative policies that risk fanning inflation or widening the current account deficit? To what extent do officials have the policy flexibility to stoke growth, smoothen downside growth risks or stave off a recession? We touch upon these questions in the individual country sections below.

• While the narrative is almost always more important than the number itself, this GPF framework nevertheless offers a valuable screening tool that systematically evaluates growth profiles – on a stand-alone and relative basis – across the “EM-25” universe.

2. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near

Sparring remains lively in the presidential campaign, with the Prabowo camp targeting a liability for Widodo: retired generals in the cabinet.  But Prabowo is still campaigning ineffectively and defections of allied governors shows that some in his camp consider his prospects dim.  Police controversially dropped charges against a chief hard-line Islamic figure.  Anti-foreign rhetoric, chiefly from Prabowo, threatens to tug policy discourse towards his vision of barriers, autarky and state control.  Two forthcoming regulations on the property sector aim to safeguard consumers.  A review of geothermal policies is possible.  Upstream energy investment may be improving.  The IA-Cepa may conclude on 4 March.  Adhi Karya’s Jabodebek LRT faces a thorny land problem in Bekasi, where the China-backed fast train project may have complicated matters by overpaying. 

Politics: Campaign sparring continues apace, as Gerindra Chair Prabowo Subianto criticized infrastructure projects (they enable imports to penetrate further) and reiterated that “Rp11,000 trillion in Indonesian assets reside abroad”.  Campaign officials for President Joko Widodo lambasted the remarks and recalled that both Prabowo and his running mate appeared in the ‘Panama Papers’.  Meanwhile, retired generals from the rival campaigns exchanged jabs about events of May 1998; for Prabowo, the topic contains pitfalls (Page 2).  In a rare example of violence in election campaigning, a fracas outside a rally in Yogyakarta caused three minor injuries among rival youth groups (p. 4).  Elite endorsements matter little, but Widodo has garnered overwhelming support from regional heads (p. 4).  Police controversially dropped charges on hard‑line Islamic leader Slamet Ma’arif (p. 5).  Agus Harimurti Yudhoyono (AHY) takes over Partai Demokrat’s campaigning as Susilo Bambang Yudhoyono attends to his ill spouse (p. 6). 

Surveys: A newly released poll from the Cyrus Network shows Widodo’s lead intact – but the actual data is from mid‑January, a period that other polls already covered (p. 6). 

Policy News: Coordinating Maritime Affairs Minister Lt Gen (ret) Luhut Panjaitan urged greater state investment in geothermal power (p. 7).  Protecting consumers from misleading practices by property developers will reportedly be the focus of two forth­coming regulations (p. 8).  The IA-Cepa is reportedly due for signing on 4 March (p. 9).

Infrastructure: The Jakarta Mass Rapid Transit (MRT) will ramp up operations during a trial from 12-24 March, with commercial operations expected by end‑March (p. 9).  Press reports hint that the China‑financed Bandung fast train project may have overpaid for land in Bekasi, thereby complicating acquisition of nearby land needed for the Jakarta-Area Light Rail Train (LRT) project, which faces delay until April 2021 (p. 9). 

Economics: The trade minister touted FTAs (p. 11).  Upstream Regulatory Agency (SKK Migas) officials expressed optimism about investment flows into oil and gas (p. 12). 

Outlook: Although the winner is not yet clear, the loser thus far in the presidential election appears to be the international community.  Pronounced anti‑foreign rhetoric from the Prabowo camp threatens to cow policy­makers and jeopardize prudent economic management.  Excessive skepticism of international engagement would come at an awkward time: the current account deficit requires capital inflows, while protectionism would augur lower growth (p. 12). 

In this briefing:

1. Global EM Special: Andean Condors Vs Asian Elephants – Where Is the Growth in EM?
2. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near
3. INDO Snippets: Second Presidential Debate, BNLI & PNBN – This Time Is Real?

1. Global EM Special: Andean Condors Vs Asian Elephants – Where Is the Growth in EM?

Global growth is expected to slow over the coming quarters, possibly years – and emerging market economies are certainly not immune from this. Nevertheless, within this diverse universe, the pace of deceleration will be uneven. Whilst some “open” EM economies are generally synchronized with growth dynamics in the rest of the world, others will be shielded by a combination of idiosyncratic forces – including renewed accommodative (monetary and fiscal) policies, cyclical recovery or upswing in domestic growth drivers and – for some – positive political developments and reform progress. Still, other EMs are less fortunate and a growth deceleration is likely to deepen in the near-term – held back by less policy flexibility, political uncertainty and various domestic or external shocks.

With 4Q18 GDP growth reports underway, we sifted through – and synthesized – various growth indicators to introduce a “Growth-Profile Framework” (GPF) to systematically evaluate – and rank – growth profiles in a data-driven, automated and standardized manner. The “GPF” not only takes into account GDP for the most recently-reported four quarters but also forward-looking forecasts and the latest economist revisions, which often take into account the latest data surprises and other material developments.

The observation universe is the “Emerging Markets-25” (EM-25) of large, investable EM countries most often found in benchmark indices such as MSCI EM and JPMorgan (GBI-EM and EMBI) indices. This opportunity set offers a breadth of diversity spanning across Asia, EMEA and LatAm and different stages of development. 

Highlights: 

• Introducing the “EM-25” Growth Profile Framework: This data-driven, automated and standardized model generates a ranking of the “EM-25” economies based on a composite of factors reflecting: 1/ The most recent GDP growth data (in relation to three look-back periods), 2/ Forward-looking consensus growth forecasts (in relation to the most recent four quarters of GDP) and 3/ Upgrades and downgrades to those forecasts.
• Andean condors soar while Asian elephants amble along: LatAm – specifically the Andean economies (plus Brazil) – currently stand out as having the most attractive growth profiles among the EM-25. They are helped by a combination of – largely idiosyncratic – factors ranging from newfound reform optimism (Brazil), improving domestic confidence (Colombia), pent-up domestic demand (Peru) and stabilizing appetite for key commodities (Chile). This contrasts with export-oriented Asian manufacturers that dominate the bottom rankings. Elsewhere, the legacy of past macroeconomic policy choices – both painfully orthodox (Argentina) and otherwise (Turkey, Venezuela, Pakistan) – are taking their unique toll on certain other economies.
• Does growth matter for investment strategy? Yes…: Simplistically speaking, economies with exemplary growth profiles are viable candidates for long or overweight positions in equity markets and external debt. Strong growth is often associated with stronger corporate earnings potential as well as lower debt-to-GDP levels, respectively. Growth implications for FX and local debt are more ambiguous, but to the extent that a robust growth outlook guides central banks to tighten policy or lifts the government’s fiscal revenues over time, then this may also be positive for currencies and rates, respectively.

• …But it’s complicated: However, strong growth can detract asset performance if it is the result of unsustainable policies (e.g. overly loose fiscal or monetary actions) or if it leads to overheating conditions (e.g. runaway inflation or a wider current account deficit). An attractive growth profile, as with all data sets, needs to be judged against its context. Although high and improving growth is an end-goal for many policymakers, the road to strong – and sustainable – growth is far more important for its longevity (and for risk assets over the medium-term). For instance: Are growth prospects improving due to rising productivity (as it might from structural reform)? Or rather from overly-stimulative policies that risk fanning inflation or widening the current account deficit? To what extent do officials have the policy flexibility to stoke growth, smoothen downside growth risks or stave off a recession? We touch upon these questions in the individual country sections below.

• While the narrative is almost always more important than the number itself, this GPF framework nevertheless offers a valuable screening tool that systematically evaluates growth profiles – on a stand-alone and relative basis – across the “EM-25” universe.

2. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near

Sparring remains lively in the presidential campaign, with the Prabowo camp targeting a liability for Widodo: retired generals in the cabinet.  But Prabowo is still campaigning ineffectively and defections of allied governors shows that some in his camp consider his prospects dim.  Police controversially dropped charges against a chief hard-line Islamic figure.  Anti-foreign rhetoric, chiefly from Prabowo, threatens to tug policy discourse towards his vision of barriers, autarky and state control.  Two forthcoming regulations on the property sector aim to safeguard consumers.  A review of geothermal policies is possible.  Upstream energy investment may be improving.  The IA-Cepa may conclude on 4 March.  Adhi Karya’s Jabodebek LRT faces a thorny land problem in Bekasi, where the China-backed fast train project may have complicated matters by overpaying. 

Politics: Campaign sparring continues apace, as Gerindra Chair Prabowo Subianto criticized infrastructure projects (they enable imports to penetrate further) and reiterated that “Rp11,000 trillion in Indonesian assets reside abroad”.  Campaign officials for President Joko Widodo lambasted the remarks and recalled that both Prabowo and his running mate appeared in the ‘Panama Papers’.  Meanwhile, retired generals from the rival campaigns exchanged jabs about events of May 1998; for Prabowo, the topic contains pitfalls (Page 2).  In a rare example of violence in election campaigning, a fracas outside a rally in Yogyakarta caused three minor injuries among rival youth groups (p. 4).  Elite endorsements matter little, but Widodo has garnered overwhelming support from regional heads (p. 4).  Police controversially dropped charges on hard‑line Islamic leader Slamet Ma’arif (p. 5).  Agus Harimurti Yudhoyono (AHY) takes over Partai Demokrat’s campaigning as Susilo Bambang Yudhoyono attends to his ill spouse (p. 6). 

Surveys: A newly released poll from the Cyrus Network shows Widodo’s lead intact – but the actual data is from mid‑January, a period that other polls already covered (p. 6). 

Policy News: Coordinating Maritime Affairs Minister Lt Gen (ret) Luhut Panjaitan urged greater state investment in geothermal power (p. 7).  Protecting consumers from misleading practices by property developers will reportedly be the focus of two forth­coming regulations (p. 8).  The IA-Cepa is reportedly due for signing on 4 March (p. 9).

Infrastructure: The Jakarta Mass Rapid Transit (MRT) will ramp up operations during a trial from 12-24 March, with commercial operations expected by end‑March (p. 9).  Press reports hint that the China‑financed Bandung fast train project may have overpaid for land in Bekasi, thereby complicating acquisition of nearby land needed for the Jakarta-Area Light Rail Train (LRT) project, which faces delay until April 2021 (p. 9). 

Economics: The trade minister touted FTAs (p. 11).  Upstream Regulatory Agency (SKK Migas) officials expressed optimism about investment flows into oil and gas (p. 12). 

Outlook: Although the winner is not yet clear, the loser thus far in the presidential election appears to be the international community.  Pronounced anti‑foreign rhetoric from the Prabowo camp threatens to cow policy­makers and jeopardize prudent economic management.  Excessive skepticism of international engagement would come at an awkward time: the current account deficit requires capital inflows, while protectionism would augur lower growth (p. 12). 

3. INDO Snippets: Second Presidential Debate, BNLI & PNBN – This Time Is Real?

INDO Snippets brings together substantive and significant on the ground chatter that may potentially have a meaningful impact on the Indonesian Equity Market. 

Today on INDO Snippets:

• The second presidential debate was held last Sunday in Jakarta. Key moments are discussed below.
• Bank Permata (BNLI IJ) stake sale rumor is heating up on Standard Chartered (STAN LN)‘s statement. Both STAN and Astra International (ASII IJ) have been looking for buyers and Bank Mandiri Persero (BMRI IJ) and Sumitomo Mitsui Financial Group (SMFG) are said to be the strongest two candidates in winning the bid.
• ANZ’s divestment in Bank Pan Indonesia (PNBN IJ) may come to a close this year. We discussed the potential impact on holding companies Panin Financial (PNLF IJ) and Paninvest (PNIN IJ).

In this briefing:

1. Jakarta Trip – On the Ground Insight Feb 2019

1. Jakarta Trip – On the Ground Insight Feb 2019

Airport connectivity in Indonesia has reached a milestone last year when they announced the airport express but has there been any improvements in the service and load factor? The management company, Railink, definitely tries its best to upkeep their service level and increase awareness. Indonesian usage of internet through smartphones also tells about how important smartphones as a center of their daily life. 

Blue Bird (BIRD IJ) has gone creative when it comes to increase their online and offline presence; not only having an app that is comparable to Grab and Uber but also creating a dedicated taxi waiting area in a mall. Is Go-jek only a ride hailing app? My experience on Go-send tells otherwise. 

How about the upcoming Presidential election? What will happen in a rematch between Jokowi vs Prabowo? Does Prabowo really have no economic policy? His answer when asked on what sort of supportive policies to help Unicorns grow shed some light on his understandings and knowledge on economic policy. 

In this briefing:

1. Risk of Future LNG Supply Glut as Bubble of New Projects Grows
2. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate
3. Vietnam Picks up the China Baton
4. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished
5. Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note

1. Risk of Future LNG Supply Glut as Bubble of New Projects Grows

The rapidly improving outlook in the LNG industry over the last few years, reinforced towards the end of 2017 by the unexpected growth of demand from China, has set off a proliferation of new LNG projects especially from the US (Exhibit 1).

In its latest LNG Outlook report, Royal Dutch Shell (RDSA LN) is projecting from 2023 onwards a significant gap between the future LNG demand and the existing supply including the capacity under construction that could require up to 100mtpa of new LNG project sanctions by 2023.

The race to gain market share in the projected LNG demand-supply gap has produced an aggregated capacity of proposed new projects of up to 475mtpa, a number larger than the total LNG traded volume in 2018 of 319mtpa and way above the capacity required to meet the future growth in LNG demand.

Exhibit 1: Funnel of proposed LNG projects getting bigger

2. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate

Two new and credible polls show Widodo leading by margins of 18-19 percentage points over Prabowo.  This mitigates — but does not entirely eliminate — risks surrounding the 17 April election outlook.  Polls show PDI-P and Gerindra gaining at the expense of Islamic parties.  The 4th debate on 30 March could help Prabowo draw slightly closer.  The planned US$400 million relocation of a textile plant from China to Central Java bodes well, but whether central government policies are supportive remains to be seen.  Two SOEs are under corruption scrutiny: Krakatau Steel Persero Tbk (KRAS IJ) and Pupuk Indonesia.  A reasonable MRT tariff is in place.

Politics: Coordinating Security Minister Wiranto threatened to invoke the Terrorism Law on those who advocate abstaining on election day.  He may believe that high turnout will benefit President Joko Widodo – but the draconian threat will harm Widodo’s image more than it helps (Page 2).  The next presidential debate on 30 March will likely feature discussion of Widodo’s proposal to place active military officers in civilian bureaucratic posts (Page 2).  Vice‑presidential nominee Sandiaga Uno promised fisheries operators that he and Prabowo Subianto would overturn a ban on dragnet trawling (p. 4).  Constitutional Court justices will prioritize the resolution of legislative election disputes (p. 5). 

Surveys: With less than three weeks remaining until the 17 April election day, two more new polls show the lead for President Joko Widodo remains intact.  A poll by the Center for Strategic and International Studies (CSIS) took place from 15-22 March; it shows Widodo ahead by 18 percentage points, with 15 percent undecided.  Similarly, a poll by Charta Politik showed Widodo leading by 19 points; it also implies that Islamic and Islamic‑oriented parties will shrink by a third on aggregate.  Both polls indicate that the reform‑minded Solidarity Party (PSI) is unlikely to pass the four‑percent threshold required to occupy parliamentary seats; incumbent parties at risk of falling short are Hanura, the National Mandate Party (Pan) and the United Development Party (PPP) (p. 6). 

Justice: Investigators from the Anti-Corruption Commission (KPK) made arrests in cases involving the state enterprises PT Krakatau Steel Tbk and PT Pupuk (p. 10). 

Jakarta: Policymakers finally decided upon a reasonable tariff for the new Mass Rapid Transit (MRT) – Rp10,000 per 10 kilometers, with a maximum fare of Rp14,000 (p. 11).

Economics: Plans to relocate a sizeable Chinese textile plant in Central Java send a positive signal about manufacturing – but whether central‑government policies will be adequately supportive remains to be seen (p. 12).

Outlook: Plentiful poll data shows that Widodo has a comfortable margin of 55‑60 percent, with few factors likely to alter circumstances in the final three weeks.  But his opponent is brazen and risks therefore exist.  Widodo winning by only a very narrow margin is a scenario with a low probability – but a high potential impact.  Prabowo has a penchant for protesting angrily, hard‑line supporters can inundate Jakarta and the Constitutional Court has a protracted schedule for resolving disputes (its deadline is 8 August) (p. 14). 

3. Vietnam Picks up the China Baton

The US-China trade dispute simmers on. Regardless of the outcome of talks between the two largest economies on earth, the damage to the existing world manufacturing trading order has already been done. China plus one is no longer a preferential industrial location strategy for multinational companies, it is an imperative. Like Brexit, companies are beginning to relocate out of China even before the dispute is either settled or escalated. Profits can’t wait for governments to behave sensibly.

But where to go? Indonesia and Vietnam are the most obvious potential beneficiaries of the fallout from the ongoing trade dispute between the US and China. There are a number of alternatives but Indonesia and Vietnam both have large, youthful working populations (and really here we are talking about the accessible workforces on Java and in Vietnam) and both are located within easy reach of the existing Asian supply chain. But are both equally ready and equally keen to pick up the China baton? Vietnam is the obvious winner in this contest. Unfortunately, for institutional equity investors the market isn’t included in Asia-Pacific or emerging market benchmarks.

4. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished

• The dollar IS the story
• EUR punished for negative yields
• Chasing Brexit down a rabbit hole
• Gold confounds
• Bitcoin at an interesting juncture

The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.

5. Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note

On Friday, March 15th, an estimated 1.6 million students in over 120 countries (source: Time magazine) walked out of classrooms and took to streets demanding radical climate action. Climate change activism rarely grabbed headlines or wider public attention as it is doing now. Rising climate activism will continue to train the spotlight on industries/businesses associated with carbon-emission making it increasingly difficult for them to expand capacities or secure funding. Large institutional investors – sovereign funds, pension funds, insurance companies – have begun to incorporate climate risk into investment policy and are limiting exposure to sectors that directly contribute to carbon emissions – primarily coal, crude oil producers and power plants based on them. Expect sector devaluation; active investors may well look beyond juicy near term earnings and dividend yield.

Even as scientists and meteorological organisations keep warning of dire consequences unless concrete action is taken to limit carbon emissions to stall climate change, political establishment/regulators in most countries are in denial while others are doing little more than lip service.  If so, should corporates care? even though businesses are the ones that play a direct role in escalating carbon emissions. With rising consumer awareness and activism, several industries associated with carbon emissions are already facing operational and funding challenges; we believe, it pays for all businesses to be above par on ‘climate action’ – it would be in their own self-interest, not just general good. And do Investors bother? Under the aegis of Climate Action 100+, an investor initiative with 320 signatories having more than USD33 trillion in assets collectively under management, they have been engaging companies on improving governance, curbing emissions and strengthening climate-related financial disclosures. It has listed out Oil & Gas, Mining, Utilities and Auto manufacturers as target sectors. Investors have already been making an impact – by vote or exit. It sure makes logical sense to effect positive change and minimise climate risk when you have a long term investment horizon.

In the detailed note below we

• discuss how rising consumer/investor activism and/or political/regulatory changes are posing challenges to key sectors –Coal, Oil & Gas, Automobiles/Aviation, Consumer goods –  that are associated with carbon emissions. 
• analyse how rising climate activism is negatively impacting growth prospects and valuation of companies in these sectors.
• highlight the opportunities for businesses to capitalise on changing consumer preferences for products that minimise carbon footprint and differentiate themselves by being on the right side of climate action.
• present a quick primer on climate change and lay down the key facts and data on climate change as presented by World Meteorological Organisation, NASA and IPCC. 

In this briefing:

1. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate
2. Vietnam Picks up the China Baton
3. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished
4. Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note
5. US Lake Charles LNG Liquefaction Plant Tendering for Contractors: Positive for TechnipFMC

1. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate

Two new and credible polls show Widodo leading by margins of 18-19 percentage points over Prabowo.  This mitigates — but does not entirely eliminate — risks surrounding the 17 April election outlook.  Polls show PDI-P and Gerindra gaining at the expense of Islamic parties.  The 4th debate on 30 March could help Prabowo draw slightly closer.  The planned US$400 million relocation of a textile plant from China to Central Java bodes well, but whether central government policies are supportive remains to be seen.  Two SOEs are under corruption scrutiny: Krakatau Steel Persero Tbk (KRAS IJ) and Pupuk Indonesia.  A reasonable MRT tariff is in place.

Politics: Coordinating Security Minister Wiranto threatened to invoke the Terrorism Law on those who advocate abstaining on election day.  He may believe that high turnout will benefit President Joko Widodo – but the draconian threat will harm Widodo’s image more than it helps (Page 2).  The next presidential debate on 30 March will likely feature discussion of Widodo’s proposal to place active military officers in civilian bureaucratic posts (Page 2).  Vice‑presidential nominee Sandiaga Uno promised fisheries operators that he and Prabowo Subianto would overturn a ban on dragnet trawling (p. 4).  Constitutional Court justices will prioritize the resolution of legislative election disputes (p. 5). 

Surveys: With less than three weeks remaining until the 17 April election day, two more new polls show the lead for President Joko Widodo remains intact.  A poll by the Center for Strategic and International Studies (CSIS) took place from 15-22 March; it shows Widodo ahead by 18 percentage points, with 15 percent undecided.  Similarly, a poll by Charta Politik showed Widodo leading by 19 points; it also implies that Islamic and Islamic‑oriented parties will shrink by a third on aggregate.  Both polls indicate that the reform‑minded Solidarity Party (PSI) is unlikely to pass the four‑percent threshold required to occupy parliamentary seats; incumbent parties at risk of falling short are Hanura, the National Mandate Party (Pan) and the United Development Party (PPP) (p. 6). 

Justice: Investigators from the Anti-Corruption Commission (KPK) made arrests in cases involving the state enterprises PT Krakatau Steel Tbk and PT Pupuk (p. 10). 

Jakarta: Policymakers finally decided upon a reasonable tariff for the new Mass Rapid Transit (MRT) – Rp10,000 per 10 kilometers, with a maximum fare of Rp14,000 (p. 11).

Economics: Plans to relocate a sizeable Chinese textile plant in Central Java send a positive signal about manufacturing – but whether central‑government policies will be adequately supportive remains to be seen (p. 12).

Outlook: Plentiful poll data shows that Widodo has a comfortable margin of 55‑60 percent, with few factors likely to alter circumstances in the final three weeks.  But his opponent is brazen and risks therefore exist.  Widodo winning by only a very narrow margin is a scenario with a low probability – but a high potential impact.  Prabowo has a penchant for protesting angrily, hard‑line supporters can inundate Jakarta and the Constitutional Court has a protracted schedule for resolving disputes (its deadline is 8 August) (p. 14). 

2. Vietnam Picks up the China Baton

The US-China trade dispute simmers on. Regardless of the outcome of talks between the two largest economies on earth, the damage to the existing world manufacturing trading order has already been done. China plus one is no longer a preferential industrial location strategy for multinational companies, it is an imperative. Like Brexit, companies are beginning to relocate out of China even before the dispute is either settled or escalated. Profits can’t wait for governments to behave sensibly.

But where to go? Indonesia and Vietnam are the most obvious potential beneficiaries of the fallout from the ongoing trade dispute between the US and China. There are a number of alternatives but Indonesia and Vietnam both have large, youthful working populations (and really here we are talking about the accessible workforces on Java and in Vietnam) and both are located within easy reach of the existing Asian supply chain. But are both equally ready and equally keen to pick up the China baton? Vietnam is the obvious winner in this contest. Unfortunately, for institutional equity investors the market isn’t included in Asia-Pacific or emerging market benchmarks.

3. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished

• The dollar IS the story
• EUR punished for negative yields
• Chasing Brexit down a rabbit hole
• Gold confounds
• Bitcoin at an interesting juncture

The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.

4. Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note

On Friday, March 15th, an estimated 1.6 million students in over 120 countries (source: Time magazine) walked out of classrooms and took to streets demanding radical climate action. Climate change activism rarely grabbed headlines or wider public attention as it is doing now. Rising climate activism will continue to train the spotlight on industries/businesses associated with carbon-emission making it increasingly difficult for them to expand capacities or secure funding. Large institutional investors – sovereign funds, pension funds, insurance companies – have begun to incorporate climate risk into investment policy and are limiting exposure to sectors that directly contribute to carbon emissions – primarily coal, crude oil producers and power plants based on them. Expect sector devaluation; active investors may well look beyond juicy near term earnings and dividend yield.

Even as scientists and meteorological organisations keep warning of dire consequences unless concrete action is taken to limit carbon emissions to stall climate change, political establishment/regulators in most countries are in denial while others are doing little more than lip service.  If so, should corporates care? even though businesses are the ones that play a direct role in escalating carbon emissions. With rising consumer awareness and activism, several industries associated with carbon emissions are already facing operational and funding challenges; we believe, it pays for all businesses to be above par on ‘climate action’ – it would be in their own self-interest, not just general good. And do Investors bother? Under the aegis of Climate Action 100+, an investor initiative with 320 signatories having more than USD33 trillion in assets collectively under management, they have been engaging companies on improving governance, curbing emissions and strengthening climate-related financial disclosures. It has listed out Oil & Gas, Mining, Utilities and Auto manufacturers as target sectors. Investors have already been making an impact – by vote or exit. It sure makes logical sense to effect positive change and minimise climate risk when you have a long term investment horizon.

In the detailed note below we

• discuss how rising consumer/investor activism and/or political/regulatory changes are posing challenges to key sectors –Coal, Oil & Gas, Automobiles/Aviation, Consumer goods –  that are associated with carbon emissions. 
• analyse how rising climate activism is negatively impacting growth prospects and valuation of companies in these sectors.
• highlight the opportunities for businesses to capitalise on changing consumer preferences for products that minimise carbon footprint and differentiate themselves by being on the right side of climate action.
• present a quick primer on climate change and lay down the key facts and data on climate change as presented by World Meteorological Organisation, NASA and IPCC. 

5. US Lake Charles LNG Liquefaction Plant Tendering for Contractors: Positive for TechnipFMC

Energy Transfer LP (ET US) and Royal Dutch Shell (RDSA LN) have signed a Project Framework Agreement to further develop a large-scale LNG export facility in Lake Charles, Louisiana and move toward a potential final investment decision (FID). They have started actively engaging with LNG Engineering, Procurement and Contracting (EPC) companies with a plan to issue an Invitation to Tender (ITT) in the weeks ahead. We look at the potential contract size and winners and also the other US LNG projects that could be negatively impacted. More detail on the LNG project queue for this year in: A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies.