Transcript Schroder ISF Global Demographic Opportunities

Trump and The World
For Professional Investors or Advisors Only. *Schroder International Selection Fund is referred to as Schroder ISF throughout this presentation
Trump Victory
25 million jobs and Mexican Wall?
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High probability of Trade wars
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Fiscal policies ; tax cuts and high spending
Higher Interest Rate, higher inflation and bigger budget deficit
Economy will cool as inflation and interest rates rise
Trump will raises tariffs on China and Mexico products
Higher wages
Overall growth will weakening
Increase global uncertainty
– Bond yields are likely to increase
– Equity market will de-rate
– Assets price drop
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Protectionism come back and global growth lower
– The countries with dependence on global trade will suffer
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USD in demand but out look uncertain
– Boost by higher yield but higher inflation.
– Deterioration in US foreign relations with the rest of the world
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Economic Scenario
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Currency wars return:
– China might devalues the Chinese Yuan by 10% as the currency now stand at overvalues,
– Japanese Yen could follow it as Japan is the largest trading partner of China, and then possible follow
by ECB in response the move from China and Japanese.
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Trade wars
– The election of Trump as President brings a more protectionist tome to US trade policy with significant
increase in tariffs. Other countries will retaliate and the world economy descend in a trade war.
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US recession
– Slower growth in US tips into recession and will bring confidence down
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China hard landing
– A wave of bond defaults and losses shakes the financial market and could trigger the devaluation of
Chinese Yuan. The global growth slows as china commodity demand drop and commodity producers
will be hit harder
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Brexit Shake Europe
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Indonesia fares relatively better amongst EM
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Indonesia fares relatively better amongst EM
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Indonesia fares relatively better amongst EM
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Indonesia
Monetary policy fortunately still have room for maneuver, though not much
Inflation trajectory may have been bottoming,
nevertheless real rate is sufficient buffer.
Source : asianbondsonline.adb.or
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Term structure remains very steep at 200bps ,
a little fine tuning perhaps?
Source : www.BI.go.id
Asian Local Bond Markets
A good year for bond investors
Remains the best performing market across
Asia
Source : asianbondsonline.adb.org
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Nevertheless, a long bull market has made
the curve yield spread becomes tight.
IDR Bond Market
Bond yield- nominal
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Bond yield- real
IDR Bond Market
Local institutional investors have generally
met OJK requirement this year.
Source : BNP Paribas
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Tax amnesty- 1st Phase Result
A Promising Chapter
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Net asset declaration reached Rp 3,600 T – 90% of Govt target – 30% of our GDP.
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Penalty received amounted to Rp 97 T equivalent to 0.8% of GDP.
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Generated Rp 137 tn of repatriated asset.
Source: MoF
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Tax amnesty- 1st Phase Result
The Benefit of Tax amnesty
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Easing fiscal pressure
Penalty revenue amounting to 0.8% of GDP should support boost in infra-spending at 1.6% of
GDP.
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Deeper tax base
Long lasting impact on fiscal space.
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Wider tax base? Not yet – expect higher participation from SMEs in 1Q17
1st phase : ~370k tax payers participated, ~16k new taxpayers registered (~1.7-0.1% of total
NPWP)
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Improving liquidity from repatriated asset? 10 bn USD repatriated
Expect a proportion of it is in the form of SPV declaration whose investment already placed
onshore.
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Restoring confidence
Increased tax scrutiny in the last 2 years have hurt confidence in both investment and consumption.
Source: MoF
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Tax amnesty- 1st Phase Result
Asset Declaration
Rp trn
Cash and cash equiv.
Investments, incl bonds
Fixed assets incl land & bldg
Receivables & Inventories
Precious metals & other fixed assets
Sub-Total
Declaration Repatriation Declaration
Onshore
Offshore
Offshore
999
97
281
573
18
425
381
2
185
398
20
55
137
0
5
2,488
137
950
%
Cash and cash equiv.
Investments, incl bonds
Fixed assets incl land & bldg
Receivables & Inventories
Precious metals & other fixed assets
Asset composition
Declaration Repatriation Declaration
Onshore
Offshore
Offshore Asset composition
40%
71%
30%
39%
23%
13%
45%
28%
15%
2%
20%
16%
16%
14%
6%
13%
6%
0%
0%
4%
70%
4%
27%
100%
Sub-Total
1,376
1,016
568
472
142
3,575
Source: MoF
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Tax amnesty- 1st Phase Result
The most successful tax amnesty in the world
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Sectors Overview
Consumer
U-shape Recovery
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Expecting gradual recovery in consumption with revenue growth slowdown bottomed in
2015 along with manageable inflation and Rupiah.
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Potential Risk: 134% increase in electricity bill for 18m households (30% of the total
households in Indonesia), vs minimum wage would only be at 10%, coupled with
anomaly in weather that might disrupt harvest hence impacting low-end spending power.
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Big consumer companies with strong brand equity are in better position.
IDR movement in line with consumer
confidence
Revenue growth trend – 12M trailing
Expect sales growth to improve, although not back
prior to 2012-2013
Sales growth
UNVR
INDF
ICBP
KLBF
ROTI
MDS
AMRT
Total
Source: Companies
2012
16.3%
9.7%
11.4%
25.0%
46.4%
18.0%
49.1%
25.1%
2013
12.7%
10.8%
16.3%
17.3%
26.4%
17.0%
28.4%
18.4%
2014
12.2%
14.3%
19.6%
8.9%
24.9%
13.4%
19.7%
16.2%
2015
5.7%
0.7%
5.7%
3.0%
15.7%
11.3%
15.5%
8.2%
2016F
9.8%
7.8%
12.7%
8.6%
13.0%
14.0%
19.4%
12.2%
Source: Companies
Source: Bloomberg
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2017F
11.4%
9.5%
11.9%
9.5%
12.2%
11.6%
22.0%
12.6%
Telecommunication
Healthy industry outlook
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Seeing benign competitive environment which allows for price increases.
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More friendly regulatory environment
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Significant data consumption growth.
Strong industry growth (Rpbn)
Source: Companies
Rapid increase in data consumption (in tetrabyte)
Source: Companies
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Infra / Construction
Strong Growth from Infra Spending
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The government is committed to accelerate infrastructure spending with fuel subsidy removed,
higher allocation on infra budget and capital injection to SOEs
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Rolling out of infra projects should improve with new land acquisition bill.
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SoE contractors are set for strong earnings with 38% new contract growth in 2015 and are targeting
37% growth in 2016.
Higher Infra Budget From Fuel Subsidy Savings
Source: Government.
Strong Order Book with Infra Spending
Source: Companies.
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Auto
New model launching driving volume growth
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Astra seeing strong car sales (up 15% yoy) supported by new launch 7-seater low-cost
Calya and Sigra which demand was ahead of projection
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Buyer profile of Calya/Sigra are mostly 1st time car buyers, age 30-40 with family and
monthly income of Rp15m per month
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Better product positioning has allowed Astra to see almost 6% market share gain to
55%.
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Motorcycle sales however are still slow partly due to high motorcycle penetration as well
as weak purchasing power from commodity regions
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Healthcare
Update
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We are constructive on the healthcare and hospital industry due to the low penetration of
healthcare spending in Indonesia.
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Impact from BPJS-rollout has stabilized and we have seen strong growth return to
private hospitals and volume pick-up for pharmaceutical companies.
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Rising middle class and the rollout of universal healthcare also gives a positive boost to
health awareness.
Rebound in branded drug sales
MIKA’s Inpatient Admissions
MIKA’s Oupatient Admissions
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Banks
New NPL formation should slow going forward
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Loan growth decelerated to 6.7% yoy in August 2016 from 10% yoy in 2015 due to weak demand
from corporates and SME
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With M2 growth picking up slightly to 8%, this may provide leading indicator that loan growth has
already bottomed out and expected to pick up in the next few months
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In the face of still high NPL, banks are reluctant to cut lending rates which lagged versus deposit
rate decline by 25-50bp
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While loans-at-risk may remain relatively high, we think the bulk of NPL downgrade is behind us at
least for some of the banks
Deposit Rate vs. Lending Rate vs. NPL (RHS)
Loan Growth vs. Deposit Growth vs. M2 growth
(%)
(%yoy)
30.0
25.0
20.0
15.0
10.0
7.7
(%)
16.0
4.0
14.0
3.5
12.0
3.0
10.0
2.5
8.0
2.0
6.0
1.5
4.0
1.0
2.0
0.5
-
M2
Source: BI
Loans
Apr-16
Nov-15
Jan-15
Jun-15
Aug-14
Oct-13
Mar-14
May-13
Jul-12
Dec-12
Feb-12
Apr-11
Sep-11
Nov-10
Jan-10
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
-
Jun-10
-
5.0
Deposit Rate (1 Month)
Lending Rate (Working Capital)
NPL
Deposits
Source: BI
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Media
Lacklustre earnings growth
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We are negative on the sector due to tepid earnings growth and unattractive valuation.
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Although the advertising environment has improved compared to last year, earnings
growth remain lackluster due to a slower-than-expected pick up in revenues and higher
cost.
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Structurally, our long term view also suggest that TV companies cannot enjoy the
previously high growth rates as digital advertising increases at the expense of other
advertising channels such as print, radio, and TV.
Media revenue growth is correlated with GDP growth
Lackluster earnings growth
Revenue
EBIT
Net profit
Growth
Revenue
EBIT
Net profit
SCMA
1H16
1H15
2,340
2,167
1,110
1,047
833
809
8%
6%
3%
MNCN
1H16
1H15
3,569
3,331
1,298
1,305
1,002
696
7%
-1%
44%
Source: Company & UBS
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CPO Plantations
Remains Challenging
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Competition against other edible oil, especially soy, remains which limits CPO price
improvement, despite El-Nino impact.
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We are skeptical on Indonesia biodiesel story, which will likely to face challenge from
continuing low level oil price environment.
Malaysia Inventory still at highs
Source: MPOB, CIMB Research
Soybean and CPO price has fallen
sine 2010 highs
Source: CLSA Research, Bloomberg.
Spread between Soy & CPO is Unexciting
Source: CLSA Research, Bloomberg.
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Cement
Oversupply Situation Remains
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Demand growth should rebound in 2016 with economic recovery, better infrastructure development
and low 2015 base.
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However capacity utilization should still decline due to rising supply from new entrants and
incumbents
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While cost pressures are falling with lower electricity, coal and transportation costs, rising
competition should also put pressure on pricing.Weak Pricing Power
Falling Utilization on New Capacity
Source: Morgan Stanley Research..
Source: Companies.
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Property - Cautious
Oversupply Situation Remains
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Recent macro-prudently has been supportive to the sector:
 Sales tax reduction from 5% to 2.5%.
 Relaxation on 2nd home indent mortgage.
 Further relaxation on foreign ownership.
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Expect a solid end-user demand amid mortgage rate breaching historic low.
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Home prices in secondary market however has been declining, bringing potential competition with primary.
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Furthermore, low no of participants of tax amnesty would potentially persist hunting in the zoo next year, depleting
wealth creation and hence investment demand – big segment that our listed developers are exposed to.
Registered tax payers as per 2015
Corporates
Individuals
Individuals - Employee
Individuals - Non Employee
30,040,000
2,470,000
27,570,000
22,330,000
5,240,000
TA 1st Round Participants
New Registered tax payers since commencement of TA programme
Submitted SPT - Paid tax (Active NPWP)
Submitted SPT- Has not paid tax (Inactive NPWP)
379,359
10,890
301,883
66,586
Source : Kompas - 07 Oct 2016
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Coal
Update
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Coal price has rallied from a low of $51/t this year to currently $83/t.
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The rally was driven by Chinese government regulations that reduced the number of working days
for coal producers from 330 days to 276 days, which resulted in a supply decline of around 10%
YoY.
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At the same time, demand picked up following a hotter-than-expected summer and a pick-up in
power consumption in China.
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However, starting in September the government has relaxed production again and allowed up to
900 mines to produce an aggregate of additional 1mt per day and views RMB460/t (equivalent to
Newcastle of $62/t) as a sustainable level and thus we expect this rally to be unsustainable.
Coal price rally induced by Chinese govt regulations
Pick up in power consumption
Source: Bloomberg
Source : CLSA Research.
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