Bumping into Black Swans on the way to US Election
The road ahead is not so easy
Covid-19 outbreak in the US has not bottomed yet, followed with the total number of cases hit 7.89 mn as of Oct 16, 2020. Surveys give Americans poor ratings in handling Covid-19 crisis. Numbers of stimulus released will certainly be ineffective as this has affected the economy with a 31.7% contraction on the 2Q20 GDP leading the country into a recession, followed by a spike on the unemployment rate by 14.7% in Apr-2020, setting an all-time high ever recorded. On the other hand, the Covid-19 cases kept on hiking with an average of around 48,000 additional cases per day. This raises many questions on how capable the Trump regime handled the issue.
Trump is our guiding star
The 2020 presidential election is just within a few weeks. Markets are worried about a potential change from a Trump to a Biden administration, as the investors hate uncertainty. The certainty of future events is all based on Trump. As Trump has been discharged from the hospital and recovering there has not been any new negative test result release from the White House. We have prepared several scenarios on what’s to come: 1) Scenario 1: If Trump may not be eligible to continue the Presidential Election, causing a shift on US election date which will create a new history which Nancy Pelosi could act as President in a worst case; 2) Scenario 2: If Trump didn’t leave the White House, there’s a second-term curse that shows a decline on the economic on the incumbent victory as geopolitical tensions still remain; 3) Scenario 3: If Bidden sat on the Oval Office, he has pledged to repeal some of the tax cuts and impose new fees on large financial institutions. We see that Trump has been largely favorable to the markets because of tax cuts, a large infrastructure plan and his administration. Nevertheless, there are several sectors that could do well under Joe Biden such as green energy and he would relieve the tensions with China which create market stability.
Effect to the Indonesian market
We believe US elections have not generally impacted Indonesian equities directly, but occasionally there have been large potential risk such as the US election in 2016 when a sharp rise in US bond yields had later dragged Indonesian equities lower. We expect that the policies of each candidate can have an effect on the Indonesian economy. If Trump is elected, the most likely trade war between the US and China will continue and worries the Indonesian market, especially if protectionism policies are implemented. However, if Biden is elected, the geopolitical situation should be more conducive due to a fair trade policy that traditionally has been carried out by the Democratic Party.
Current uproar: Omnibus Law Approval
On 5 October 2020, the Indonesian House of Representatives and the Indonesian government agreed to pass the Omnibus Bill on Job Creation, commonly known as the Omnibus Law. The law is a breakthrough effort by the government to comprehensively amend 76 sectoral laws and amend or revoke hundreds of regulations to improve bureaucratic efficiency, create job opportunities and improve Indonesia's investment ecosystem, which we believe its bring more positive tone for big and small businesses in Indonesia. The Omnibus bill on job creation had 11 main clusters, includes manpower law, easing restrictions on foreign investment, business licensing, land acquisition, tax provisions and environmental laws. We note that investors are likely to welcome this sign and attract more FDI inflows. Nevertheless, the effects will take time and depend on how the law are implemented.
Is Now a Good Times to Invest?
We believe that the successful of vaccine trials and the lockdown opening period are important issues for determining market direction. The Indonesian government said it has secured the procurement of the Covid-19 vaccine for 135 mn citizens (~270 mn doses) until FY21E. In addition, 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 and 3Q20. Investors should also pay attention to the high volatility that will occur ahead of the US election in early Nov-2020. We estimate, as long as the JCI does not break the support at 4,800, it has the potential to test its resistance at 5,381 level. Therefore, MNCS recommends BUY on Weakness when the JCI approaches the 4,800-4,920 level with a focus on Banks, Property, Construction and Telco-Tower sector particularly that benefited from current Omnibus Law such as: BBCA (BUY; TP: IDR31,600), BBNI (BUY, TP:IDR5,700), BSDE (BUY; TP: IDR1,110), SMRA (HOLD; TP: IDR700), WSKT (BUY; TP: IDR790), WIKA (HOLD; TP: IDR1,290), TLKM (BUY; TP: IDR3,600), TOWR (BUY; TP: IDR1,150). Meanwhile, there is a potential of short-term strengthening in the Metal Mining Sector, as government plans to build a USD12 bn nickel-based battery manufacturer.
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