Equity or Bond?
A couple of days ago, my boss asked that question after he saw this picture:
And here’s my answer:
Looking at a longer period, bond is always traded at discount compared to equity since 2013. Maybe that partly explained why foreign investors keep coming in for bond.
But currently the discount is narrowing (which on the other hand signalling a “cautious” period). The last time bond traded at premium vs equity was in 2012 – Q1 2013. not long before the market collapsed
In Indonesia, bond & equity asset can be grouped into one basket asset since both correlation is positively high (typical emerging market, shallow market size > easily driven by foreign inflow). Thus looking at Earnings Yield vs Bond Yield discount will only useful as a gauge of market mood (over bullish/bearish) rather than as gauge for switching asset class (as in the case of negative asset correlation).
Back to initial question, I think currently the bond has less downside risk compared to equtiy, for the following reasons:
- Investment upgrade > capital inflow expectation.
- High FX Reserves > to counter capital outflow > stabilizing IDR.
- Govt front loading + better fiscal management > less risk on additional bond supply.
- Subdued global inflation > support global bond > support domestic bond.
- Subdued global recovery > less aggressive Fed rate hike > positive for bond.
- Waning expectation on Trumpnomic > short-term support for bond.
- Dovish ECB and BoJ.
Short-term, bond & equity have the same opportunity for another rally. However, Q3 is a critical period since it will decide whether the year is a bull (2014,2016) or a bear (2013,2015).
What we need to closely monitor is the development of US market. Using Hull Moving Average, the domestic market is already in a “sell” area, but the global market is still on “buy”. A strong sell signal is when both domestic & global are in “sell” area
US Market with Hull Moving Average: alert on bond market
Indonesia Market overlay with Hull Moving Average: signaling correction
*all data as of 15/6/17, source: bloomberg
Key risk factor to watch:
- Domestic Q2 financial report result.
- Consumption during Lebaran > indicator of purchasing power for the rest of the year.
- Global development (Brexit, Trump, The Fed, ECB, China, etc).
– — – end of post #58