THE ANOMALY

Analysts & economists predicted that the winning of Donald Trump as the US president will result in “risk-off” movement which will make stocks lower, bonds yield lower, old price higher, and USD lower. But what happened was the exact opposite. It’s definetely “risk-on” mode.

GOLD SPOT PRICE (USD/troy punce)

Gold retreated after hitting $1,300 level a week before election.

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USD INDEX

USD strengthen against all currencies almost hitting its highest level last year when The Fed finally raised rates after 8 years. Will Janet Yellen be able to raise rates eventhough Trump urges her to do so?

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DOW JONES INDEX

The Dow rallied, closing at all time high level.image

US TREASURY 30 Year Yield

UST was sold off as investors exited bonds and collected equity. This caused major drawdown to bonds’ prices all around the world driving yield higher especially in the emerging market. (With approx. duration of 20, +0.3% yield result in approx. -6% in bonds price). Will this be the inflection point of “lower for longer yield” all around the world?

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DE-GLOBALIZATION

“Deglobalization or Deglobalisation is the process of diminishing interdependence and integration between certain units around the world, typically nation-states. It is widely used to describe the periods of history when economic trade and investment between countries decline.” – Wikipedia

Brexit & the winning of Donald Trump was just an early indication that we are heading to deglobalisation. The populist movement is increasingly popular. Promising to limit or even eliminate imigrants, terminating trade agreements (which are deemed to be harmful for the locals) in order to increase domestic competitiveness and thus creating more job domestically, and lists of heavenly promises seem to work out in earning votes. Soon we will have crucial political events in the Eurozone starting with Italian referndum (Dec 16), French election (Apr 17), German election (Oct 17). It won’t be surprising if the elections are won by the populist party. The future of EU is in big question.

Unfortunately, regret always comes later. People don’t care about the painful economic consequences until they experience it. I just can’t imagine how US companies move their factory back to the US from cheaper Asian countries. Even if Trump lowers the corporate tax by 50%, will that be enough to offset way more expensive labor cost? Would the locals accept lower wages if the US companies are to move their factory back? If the answer is no then what they’ll get is more jobs but also more expensive prices which is a zero sum game, if not an overall negative result. Trump also wants to reduce tax and at the same time increase fiscal spending. It sounds very beautiful but just doesn’t sound right. As we all know, fiscal spending is financed by tax revenue. So if trump earns less and spend more, needless to say it will increase the fiscal deficit and it’s not a good thing. Why wouldn’t the Obama administration practice this if it’s harmless?

GLOBAL GROWTH

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Asia, the world’s factory will be impacted. North asian (China, Japan, Korea) countries will feel the pain most as their export to the US accounts for significant share of total export. As global trade deteroriates, demand for commodities (energies)  is likely to decrease. Not to mention that shale producers managed to cut their cost of production from $80 in 2013 to $40 in 2016 (average industry). This is definetely not a good news for emerging markets which majority rely its economy on commodities. If Asia as the main contributor for global growth driver slows down, who will replace it?

INDONESIA

JCI lost 4% closing at 5,231 with foreign outflow of IDR 3T on 11 Nov 2016. For the past 3 months accumulated foreign outflow from JCI is around USD 1 bio ( IDR 13.3T). IDR 10 year yield closes at 7.88%. IDR bottomed out at USD/IDR 13,800ish level and closed at 13,380 due to central banks’s intervention. Indonesian market suffered from big lost last Friday stopping it to be the best performing market this year.

Jokowi is facing tough political situation as the other politician funded massive movement accusing Ahok the current governor of blasphemy. The shadow repatriation (please check my previous notes for details) has not started as people are still waiting to see if Jokowi can handle policital traps & attacks allegedly from ex-president whose son left the military and stepped in as one of the candidates of Jakarta governor election in 2017. The movement threatened to bring riot to Jakarta if the president doesn’t punish Ahok the righteous governor who is not guilty but has been used as a bait to attack Jokowi.

Aside from uncondusive political conditions, Indonesia stocks & bonds are obviously undervalued. I still expect volatility in a week or two but the market should calm itself soon. This is an interesting entry point for investor but not necessarily true for traders. This kind of turmoil always happens when there is uncertainty, people are always resistant to change, at first. Will Trump be able to practice all his promise? Let’s see. But not matter what happens next, people will be able to adjust and adapt to the new environment. When it really happens, welcome to the new world order!

Disclaimer : This note is not a research report. It doesn’t represent any company, institution, or individual. This is not a recommendation or suggestion. Information and data are collected from various public sources. Reader should be able to distinguish between fact on opinion.

 

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