Year of The Rabbit : Leap Into the Year of Asia

If we look back to a very remarkable Year of Boris’ bigger version a.k.a “Year of The Tiger'' in 2022, it reminds us that 2022 was not an easy year for most capital market players. But thankfully, Indonesia is one of the corners in the market which fortunately triumphed in the current condition, and lucky enough to outperformed other capital markets.

Like the nature of a tiger, investors are expected to have both strength and courage to get through the year well.

However... even though 2022 was a difficult year, finally we get to start 2023 with a clean slate. The New Year surely brings new fortunes. Chinese culture through its zodiac sign predicts 2023 will be a year full of hope.

In Chinese tradition, each animal is attributed with traits and symbols that hold meaning for what has to come in the New Year. The Rabbit is pictured as the luckiest among the 12 other animals of the zodiac given it also symbolizes energy, elegance and beauty. It is associated with peace, prosperity and longevity in Asia. Across Japan as well, it is a symbol of fortune, progress and savvy.

We are neither a feng shui expert or baji guru, but as equal enthusiasts we can’t help to come up with our own take on the upcoming Rabbit year.

R.A.B.B.I.T

R – Recession

This could be the most anticipated recession ever. From rising rates caused by inflationary pressure - and yet to mention the acute geopolitics - we are witnessing multiple reasons why everyone is tightening their belt. “Recession is coming” becomes the consensus general theme. IMF predicts 40% odds of recession in the US, for example.

The risk of a US recession is mounting as pictured by the inverted yield spread for the past 6 months (a powerful indicator to predict recession because we all agree that bond traders have always been right for the last few decades). Not only that, our argument is also based on the US debt to GDP ratio which is already very high.

Later, with our projected US economic growth of only 1% and projected inflation of 3-4%, this will lead to the US doing a hard landing, and neither a credit event nor financial crisis will be difficult to avoid. That's why, our Chief Economist, Mike firmly believes that The Fed will cut their interest rates sooner than expected with a rate cut of up to 250 bps. Like it or not, The Fed might also need to apply quantitative easing, which has the implication that the dollar will no longer be favorable in people's eyes, because inflation has not yet come down.

If everybody believes that a recession is going to happen, it means consumers need to start to pull back the reins a little bit on their spending. For businesses, instead of doing capital expenditures or hiring someone, they will slow down and it becomes a self-fulfilling prophecy.

With the destructive combination of high policy rate, sticky inflation and uncertainty of the dollar, we are committed to our view that recession should transpire.

A – Aurum

Aurum, the Latin word for gold, will be everyone’s hot topic to be discussed this year. 2022 was another volatile year with much uncertainty over the direction the gold price would take. For 2023F, gold price will have a few large drivers for investors to watch for. If hard landing causes a real rate cut as we predict today, we feel that dollar weakness is inevitable in 2023. How these events continue to evolve in 2023 will have an impact on the gold price.

However, if we look for the relationship between gold and the yield spread of US treasury, which is the leading signal for a recession in the US, and also with The Fed's rate cut and dollar weakness, gold proved to be a safe haven asset amid recession fears.

With this data and several other variables such as world gold prices, US Dollar, S&P 500 Index, VIX Index, United States M2, Brent crude oil prices and Bloomberg commodity price index, Mike have been bringing up his call since last October that the gold price will trade between USD1,837 to USD2,300/oz in 2023.

B - Bretton Woods 3

For those of you who are not familiar, let's reminisce on history for a moment. Under the Bretton Woods System, gold was the basis for the US dollar and other currencies were pegged to the US dollar’s value. It created a lasting influence on international currency exchange even though the system collapsed in the 1970s along with the global stagflation which triggered by the Arab-Israeli Yom Kippur war and massive US government budget deficit to finance Vietnam war which resulted in many countries losing their trust in dollar as a global reserve currency.

Not quite up there, it seemed the United States wasn’t running out of ideas until it made a new agreement about the petrodollar system with Saudi Arabia which was finally able to save the dollar in the 1970s.

Well.. The US dollar must bury its dream to be great forever. ‘Cause the condition is quite differ this time.

The question that often arises in our minds is, is the US dollar still in such demand?

We have to admit that in the past, all forms of transactions used dollars as the main currency. But, what about now? Because in fact, many non-traditional currencies have played a larger role in global forex reserves in the last few decades and it began to erode the position of the US dollar as the most used currency in the global market, coupled with the fact that there was a sharp decline in the use of US dollar in Russian and Chinese transactions. In fact, Middle Eastern countries have just started to accept Yuan as a currency for transactions.

And with all the bits and bobs above, we expect other leading emerging economies like BRICS will be ready to take the reins or supplant the dollar.

B - Bull Market

Despite the global economic recession, our consensus holds that Indonesia’s economy will be able to withstand indefinitely. With the support of projected high commodity prices, the nation’s terms of trade should be in a good place. Next year, Indonesia’s current account can very likely be kept in surplus while domestic and investment spending simultaneously increase.

In terms of external performance, we also believe that Indonesia is well prepared to handle the struggles experienced globally. With a well over two-years of maintained positive current account balance, the Rupiah and bond markets stabilized under The Fed’s strict monetary policy pressure. According to Bank Indonesia (BI), the most recent regulations governing export revenues (DHE) have been released and will be implemented effective February 2023. Mike’s estimation is that foreign funds of up to USD30bn can be taken back in domestically, thus we expect that Indonesia would be able to maintain its current account surplus of 0.7% of GDP, and the Rupiah could even stay below IDR15,000 per USD.

We anticipate that Bank Indonesia (BI) will lower its policy rate this year in line with The Fed. In the event that The Fed Funds Rate is decreased by 250 bps (and, hear me out, this is our soft-landing cut-rate assumption!), we predict that BI will reduce its benchmark rate to 4.0% next year (from 5.75% estimated in end-2022). In line with this, our HoR Edward predicts a bullish 2023 year-end JCI target of 8,300.

I - Iron & Steel

The reopening of China, as our On China analyst, Jimmy, has rightfully predicted in 3Q22 will happen sooner than later, is currently happening before our eyes. We anticipate China to continue its progressive economic reopening in 2023 and move on from its rigorous zero-Covid regulations after an economic slowdown of merely 3% GDP growth in 2022. China is expected to implement a more pragmatic approach regarding Covid, which will support the demand boost of Indonesia’s key export commodities – namely coal, CPO, and iron and steel.

Demand for the variety of commodities is anticipated to increase after the spring festival in 1Q23, which could counteract the softer demand in 2023 due to global macro uncertainties. This will follow the eradication of the strict zero-Covid policy. Since about 70% of China’s power is still produced from coal fired power plant in the pre-Covid era, as the economy heats up, we anticipate demand for electricity to rise.

Key things to observe: Will China’s green energy prove to be reliable this year? Or will it flop like in the past 2 years?

As we write this, China has introduced new regulations to improve the overall state of the real estate market, with a focus on making finance more accessible to both property developers and consumers. If properly implemented, this ongoing support for the industry might increase people's desire for real estate investment, which would eventually increase demand for nickel used to make stainless steel.

T - Timing and Tips

The (Water) Rabbit is renowned for its flexibility and creativity in problem-solving. Thus, 2023 is a great year for networking, looking for new opportunities, and being adaptable. As also mentioned, the Rabbit is widely known to symbolize wealth and prosperity, thus now is THE time to concentrate on our finances and strive towards boosting our income (although every other year this would be relevant too!). Whether it be investing in stocks, real estate, or other kinds of savings’ plans – make sure to implement wise financial decisions.

Word around the block is saying that 2023 is a favorable year for bonds. It has been a long time coming, but returns in the fixed income markets seem set to recover after years of low yield and a severe price decline in 2022. Mike even projects that the yield on Indonesian government bonds will drop to 6.3%, or even lower, following the anticipated Fed pivot to occur sometime this year.

In terms of equity strategy, our approach is based on renewed optimism - Fed policy pivot and China reopening. Our bullish JCI target of 8,300 is based on a 13.0x forward PE (-1SD of 10-year mean). We believe that the policy change, along with rising commodity prices (moderate earnings growth), will continue to increase foreign investment in JCI. For the Year of the Rabbit, our sector picks include banks, metal mining, automotive, cement and retailers.

In conclusion, as the wheel of life keeps turning, nothing lasts forever.. This is especially true for the ebbs and flows of the capital market. With every rise, comes a fall; with every fall, comes a rise. In the end, we just need to learn how to ride the waves and secure a position for each season.

Especially for those with the Rabbit Chinese Zodiac, it has been said that being in your birth year will not be an easy feat (“year of Ciong”, as they say it). Rabbits are predicted to not have excess luck in terms of income and investments for the year- thus all the more reason to make sound financial planning from the beginning. Make sure to prioritize liquid investments to gauge for unforeseen circumstances and expenses. Build on your strengths for the year - in which Rabbits are thought to be the bringers of calm, peace and tranquility.

Finally, regardless of how you may choose to approach the Year of the Rabbit, let’s close this segment with one my favorite quotes from the man himself – Warren Buffet: (Be) “fearful when others are greedy and greedy when others are fearful.”

Happy Chinese New Year 2023! May the luck be with you.