How Low MAY You Go? - Part 1
Economic Downturn Could Set Stage for Rough First Half 2020
JCI posted a -27.02% YTD decline in May 08, 2020 to 4,597 level. The plunge in the JCI was driven by several factors such as: 1) Investor concerns about the spread of Covid-19 that inevitably affected the global market, which has infected more than 3,84 million people worldwide and killed almost 269,000; 2) Oil-producers, Russia and Saudi Arabia triggered the oil price war in the aftermath of disagreement in the production volume at the OPEC summit which led to a fall the oil prices more than 60% since the beginning of 2020; 3) Rising geopolitical tensions, such as concerns about a ‘Trade War’ between the US and China. Foreign investors persisted with a net sale, dumping IDR20.95 trillion in May 08, 2020 compared to a net buy IDR63.24 trillion in the same period last year. Moreover, Indonesia’s weakening domestic data on GDP, inflation and PMI which further suppressed the index movement. Indonesia's GDP in 1Q20 only grew 2.97% YoY (-2.41% QoQ) followed by “unusually” low inflation at the start of Ramadhan in Apr-2020 at 2.67% YoY (0.08% MoM). Furthermore, the activity of Indonesia's manufacturing industry was recorded at its weakest level in 9 years history as reflected in the PMI Index at the level of 27.5 in Apr-2020 (vs 43.5 in Mar2020) due to the Large Scale Social Restrictions (PSBB) implementation.
Sell in May and Go Away: "Black Swan is a New Normal"
Sell in May and Go Away refers to the popular belief that equity markets tend to go down in May. Historically, during May, the average of JCI return for 20 years was relatively thin at 0.35% level. Several domestic factors that suppressed the JCI's performance include the release of first quarter economic data and the company’s performance that missed with expectations. We also note that August and October became the months with the lowest return in the past 20 years at -2.16%/- 0.34% respectively. Moreover, we believe the Black Swan phenomenon to be normal in this May 2020 in which events have occurred unexpectedly and caused a stir in the financial markets as we have stated on the MNCS Primbon Index 2020. Some of them are due to multiple sentiments: 1) Lower estimated GDP growth in 2Q20E; 2) Potential recession due to temporary shutdowns on activity. We believe this seasonal patterns can be utilized by investors to accumulate selected stocks with good fundamentals that are expected to sustain their dividend yields.
Game Changer: Vaccine and Opening Lockdown
We believe that the successful of vaccine trials and the lockdown opening period are important issues for determining market direction. Based on several studies, a gradual lockdown will be held in June and July 2020 (see exhibit 03). Currently, countries around the world are using different vaccine technologies to create and try the Covid-19 vaccine such as: 1) China; 2) US; 3) Germany; 4) Italy; 5) UK. While the Indonesian Ministry of Health said it would conduct clinical trials of vaccine candidates for Covid-19 patients using remdesivir and three other types of medicine. However, until now, WHO and the Ministry of Health have not clearly explained the success of the vaccine so the market is still waiting for certainty. Experts think there will be a second wave of outbreak, most likely again in the latter half of this year. We believe that the Covid-19 issue will gradually decrease in June-July 2020 but the negative impact looming the economic downturn led to a recession and lowered the corporate credit rating both private (e.g. MDLN, PANR, TELE) and SOEs (e.g. Perum Perumnas, PT Pos Indonesia, PJAA, WSKT) which will still frightened until 2021.
MNCS Trading Strategy: BUY on Weakness!
We see that high volatility in the stock market will still occur, where the earnings could potentially decline at -10% to -30% level in FY20E with the worst decline occurring in 2Q20/3Q20. Of course this is not yet fully priced in to the market. However, after June 2020, investors will focus on earning story growth where the IMF expects a recovery in 2021 as the Indonesia’s GDP may expand to 8.2% from 0.5%. From the current position, JCI tends to be limited with potential increase to 4,800 level where the main strengthening factor is not coming from a fundamental side, but from the buyback programs and an active mutual fund manager, which is also very difficult to validate in the midst of net foreign flow. Therefore, MNCS recommends BUY on Weakness when the JCI approaches the 4,200 level with a focus on the Consumer, Telecommunication and Selected Banks sectors particularly on high-yield dividend stock and some blue chips such as: ICBP (BUY; TP: IDR11,500), GGRM (BUY; TP: IDR55,450), TLKM (BUY; TP: IDR3,600), ASII (BUY; TP: IDR4,900), BBRI (BUY; TP: IDR3,200) and BBNI (BUY; TP: IDR4,300).
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