Roller-Coaster Ride: Sell on News!
Crazy Upswing as if everything’s Alright?
DJIA, S&P and JCI Index have increase by 0.57%/1.29%/10.90% (per Apr 6th, 2020) from our latest Investment Strategy Update on Mar 26th, 2020. Compared to the prior S&P index rebounds in 1927 (+18.21%), 1987 (+14.92%) and 2008 (+23.25%), the current return is relatively in average at 17.55% level. However, based on historical pattern (see exhibit 01), the current uptrend might as well be a bear trap for the upcoming plunge. Moreover, these index increases are supported by a more optimistic outlook due to the slowing down growth of Covid-19 cases in the US which currently stands at 337,646 confirmed cases, being the country with the most confirmed case, with 5.21% recovery rate and total deaths of 9,648. While China also reported a significantly decreasing number of Covid-19 each day with the current case of 82,641 being the highest to recover with 77,300 recoveries (93.54% recovery rate) and 3,335 deaths. Although cases in Indonesia are still increasing to 2,273 cases with 7.22% recovery rate and 198 deaths (based on JHU, Apr 6th 2020) which we believe it still has not reach the peak, the Government keeps on releasing new policies to suppress the spread, as well as providing various stimulus to maintain economic resilience. So, with these progresses, will this optimism last? Is everything REALLY all right?
Hard Reality: Recession and Depression Threats are Lingering
We believe the strengthening of DJIA and JCI by +13.23%/+20.61% respectively from March 23, 2020 to April 6, 2020 is only short-term due to US and Indonesian government intervention by issuing fiscal stimulus worth to USD2 trillion and IDR405 trillion (~USD25 billion) in response to mitigate the impact of Covid-19. Meanwhile, some negative catalysts that must be observed include: 1) The US non-farm payroll decreased by 701,000, which shows the negative impact of Covid-19 on the economy, and became the first decline since 2010. In addition, the unemployment rate increased at 4.4% MoM (vs 3.5% MoM in 2M20), higher than the estimate at 3.8% level in 3M20; 2) The US and Europe currently become the top 5 epicenter of the Covid-19 outbreak with total cases reaching 792,143 (as of 6 April 2020).
Fears are growing that the worldwide economic downturn could be deeper specifically within the transportation sector, tourism, retailers, supply chains and commodity markets which have weakened due to temporary shutdown. Therefore, the OECD revised its global economic growth target to 2.4% (vs previously at 2.9%), US’ GDP to 1.9% (vs previously at 2.0%), China’s GDP to 4.9% (vs previously at 5.7%). KMPG even predicted that Covid-19 outbreak could potentially pull US economic growth down to negative zone at -4.5% in FY20E and will recover in FY21F/FY22F by -1.1%/0.8% YoY. Whereas BI, together with the Ministry of Finance, revised Indonesia's GDP growth from the previous level of 5% in FY20E to only 2.3%, even the worst case scenario could reach the negative zone at the level of -0.4%. Meanwhile, the Indonesian PMI index stood 45.3 in 3M2020, reaching the lowest level in the last 3 years. We believe that if this outbreak continues within the next 2 months, debt fund risks of default (corporate bond) will increase, especially for the financial sector. Therefore, we estimate FY20E earnings will weaken around 5% -30% in all sectors.
Trading Strategy amid High Volatility: Sell on Strength
MNCS evaluates that the JCI index rally is a respond to a short sentiment turnaround against Covid-19. However, we see that this increase is not supported by a solid improvement from the real economic, where it is estimated for a future downtrend. Technically estimated, JCI can still potentially surged to 4,800 - 5,000, while the decline potential is below 4,200 level. We also have describe in the Primbon Index that FY20E will be a bumpy year with a high volatility. Therefore, we recommend Trading SELL to take profits on bluechips stocks that we have recommended before.
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