Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify.
Speaker: Search for HSBC Global Viewpoint or join us via the HSBC Global Banking and Markets page on LinkedIn.
Speaker: However you're listening, analyst notifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Speaker: Hello from Hong Kong, I'm Fred Newman, Chief Asia Economist at HSBC.
Speaker: And I'm Harold van der Linde, Head of Asian Equity Strategy at HSBC, coming to you from Indonesia, which is very much the focus of today's podcast.
Speaker: That's right, it's the world's fourth most populous nation, spans an eighth of the globe and is tipped to soar up the global economic rankings in years to come.
Speaker: It's a story of infrastructure, commodities, and a rather unique consumer market, something we will be discussing with our RZN consumer analyst, Selvijana Aripin, a little later on the show.
Speaker: That more coming up here on The Bond Entry.
Speaker: So, Harold, you're actually in Indonesia right now.
Speaker: Where exactly are you?
Speaker: I'm back in Jakarta today.
Speaker: I was for the last couple of days in a city called Kuningan in West Java.
Speaker: There's a couple of things that bring me here.
Speaker: First of all, we had a family reunion over the weekend.
Speaker: Something like 150 people or so gathered in a town a couple of hours outside of Jakarta.
Speaker: And I'm going to have a holiday over the next couple of weeks.
Speaker: And one of my new topics of interest, stuff that I want to learn about, is the Majapahit era, which is an old Indonesian kingdom from the 13th century.
Speaker: So I'm going to go to East Java and visit some of the temples that are still there and meeting with some archaeologists who hopefully can really fill me in on that time frame, the birth of modern Indonesia, as you could call it.
Speaker: It sounds like an exciting holiday, but you're shuttling around Java.
Speaker: Are you stuck then in traffic most of the time during your holidays?
Speaker: Yeah, normally if you go around Java and you go, for example, like to Kuningan where we have our family reunion, you've got to basically calculate that you're going to be stuck in traffic for quite a few hours.
Speaker: In the 90s, when I went there for the first time, when I just met my wife at the time, it took us about seven hours to get there.
Speaker: But the good thing is that there's now a new highway.
Speaker: So...
Speaker: As soon as you get onto the highway, it's only a few hours.
Speaker: So to my surprise, this morning when we drove back, it took us about three and a half hours.
Speaker: Now that's a way down from the, as I mentioned, seven hours in the nineties.
Speaker: And my wife told me that in the seventies, it was nine hours.
Speaker: And there's also a new Metro, I think in Jakarta itself.
Speaker: Have you, have you taken that Metro yet?
Speaker: Yeah, I've taken that one already and I'm going to take it tomorrow as well.
Speaker: So I'm currently in Southern part of Jakarta where my family lives.
Speaker: I need to go to the center of Jakarta, so I'm going to take a taxi to an area called Lebakbulus, and from there on you can take the metro in.
Speaker: I understand you've got to wait maybe 10 minutes for every metro to arrive, but beyond that, it's rather comfortable, actually.
Speaker: So it's interesting to hear that a lot is changing on the ground when it comes to infrastructure.
Speaker: You really can feel that, you know, being there right now.
Speaker: It really fits into the broader context.
Speaker: growth agenda of what the president has delivered in recent years, which is focusing on infrastructure, especially a lot of the transportation connections in Java, but of course, ports as well.
Speaker: There is a high-speed rail line.
Speaker: Have you seen any signs of that coming to fruition?
Speaker: Yeah, that high-speed rail line is currently under construction.
Speaker: That is definitely one of the kind of bigger projects that they have.
Speaker: But the other projects that they had were harbors fret.
Speaker: And that means they can get commodities in and out.
Speaker: And infrastructure has been a key driver of the economy, but I think commodities as well, right?
Speaker: Yeah, exactly.
Speaker: Expanding the harbors, of course, key to bring all these commodities to market.
Speaker: And Indonesia is one of the key suppliers of various commodities in the world, coal being one of them.
Speaker: Palm oil, of course, is another big one.
Speaker: Natural gas, actually, they're exporting that as well.
Speaker: And then you have a whole range of other types of commodities like nickel, for example.
Speaker: But here, actually, the strategy is to move into other areas to kind of add more value, not just to export the raw ores, but really to process this.
Speaker: And electric vehicle batteries, for example, are a key part of this.
Speaker: Is that something that you've picked up on the equity side?
Speaker: Yeah, indeed.
Speaker: I mean, it's not that there are listed companies who do this, but there are listed companies that make nickel.
Speaker: They don't make the batteries.
Speaker: But if you look at the global battery food chain, Indonesia suddenly becomes a very big part of that.
Speaker: It is the largest producer of nickel on the planet.
Speaker: And nickel you need in these batteries.
Speaker: So suddenly all sorts of electric vehicle companies from Korea, from the US, from China have gone into Indonesia and said, we need to invest there.
Speaker: And just rightly, as you say, so build up.
Speaker: capacity to make some of these batteries.
Speaker: And I suspect that has got some
Speaker: beneficial impact on the current accounts for Indonesia.
Speaker: That's right.
Speaker: Actually, right now, Indonesia has barely a trade deficit.
Speaker: In fact, it runs quite sizable surpluses in various months.
Speaker: And that's giving the economy a lot of macroeconomic stability.
Speaker: We're always used to Indonesia looking a little bit shaky when the Federal Reserve tightens monetary policy, famously during the taper tantrum several years back.
Speaker: But currently, during this tightening cycle by the Fed, Indonesia looks much more stable, in part because that strong trade position that the country has helps to anchor the balance of payments.
Speaker: And therefore, there's a real macroeconomic anchor here because of high commodity prices and these exports.
Speaker: But the question is then, from an equity market perspective, is that also reflected in the earnings that we see across the market?
Speaker: Yeah, I would say so.
Speaker: So earnings growth in Indonesia is actually fairly robust.
Speaker: Indonesia is one of the fastest growing markets across the region this year, for example, after the Philippines, it's the second fastest growing market in Asia.
Speaker: So robust earnings growth, but it's not just that the macro is good.
Speaker: I think there's something else going on as well.
Speaker: What we've seen in certain industries in Indonesia is that there is industry consolidation taking place.
Speaker: So we see this in the telecom industry, for example.
Speaker: But some other industries as well, some of the leaders are really taking over.
Speaker: That gives them pricing power.
Speaker: And what about the tech space?
Speaker: Last year, there was, I think, a lot of inflows into Indonesia's burgeoning tech sector.
Speaker: Indonesians are using their mobile phones to order food.
Speaker: It's a huge sector growing.
Speaker: FinTech is playing a role here.
Speaker: Is the tech sector really a growing space in the listed universe?
Speaker: Absolutely.
Speaker: And one of the nephews that I met on my family reunion is currently interviewing for a job at some of these tech companies.
Speaker: Another one just got a job there.
Speaker: So it seems like these tech companies are still growing and taking off talent from the universities.
Speaker: But some of these Indonesian tech companies are homegrown, larger tech companies that have really emerged, have listed on the stock exchange and now belong to some of the largest companies
Speaker: in the Indonesian stock market.
Speaker: So it changes the dynamics of these Indonesian stock markets as well.
Speaker: So that's a real positive development for this market.
Speaker: And then another promising sector must be household consumption.
Speaker: Now, there are over 270 million Indonesians spread across 13,000 islands.
Speaker: It's a huge consumer market, the largest actually in Southeast Asia, very young population growing very fast.
Speaker: How do we tap into this consumer market?
Speaker: Is that a promising investment proposition?
Speaker: I believe so.
Speaker: I mean, you're right.
Speaker: This is a large consumer market, the largest in ASEAN, and some studies believe that by the end of this decade, it could be the fourth largest consumer market on the planet.
Speaker: So this is a market that should not be ignored.
Speaker: And there are multiple ways to get exposure to the Indonesian consumers.
Speaker: There are staple companies, and they sell food.
Speaker: Think about milk and bread and noodles and these sort of things.
Speaker: There are companies that sell motorcycles or cars.
Speaker: There are mall operators, they're luxury companies.
Speaker: So there's a wide range of companies actually listed.
Speaker: And indeed, you can also get exposure to the Indonesian consumer by thinking about the tech companies that we mentioned earlier on, because there are online platforms that sell all kinds of stuff and deliver stuff to people across the whole archipelago.
Speaker: So we should probably look a little bit deeper then at that sector and bring in our expert, Salviana Aripin, who's actually our ASEAN consumer analyst and hails from Indonesia.
Speaker: Welcome, Silviana, to Under the Banyan Tree.
Speaker: Well, Harold, thank you for having me.
Speaker: So COVID has had a tremendous impact on consumer demand over the last couple of years.
Speaker: And across the region, we've seen wild swings in consumer spending.
Speaker: Some of the countries across the region seem to getting out of this.
Speaker: Is this also the case for Indonesia?
Speaker: Well, it's somewhat of a mixed bag, Harold.
Speaker: I think some consumer companies have recovered faster than others.
Speaker: take the case of companies whose target market is the mid-to-mid-upper segment of the consumers, these type of companies tend to recover faster than other companies whose target market is the mass market.
Speaker: We also observe
Speaker: for companies that cater to consumer health needs, particularly COVID-related needs.
Speaker: They have never had a down year in 2020, in 2021, because consumers are very keen in making sure that they are in tip-top health condition.
Speaker: And now that the economy is reopening, some of these companies are starting to see revenue being slightly weaker than what they used to be in 2020 and 2021.
Speaker: So it's somewhat of a mixed bag.
Speaker: So, Viana, we've seen a lot of inflation across Asia, including actually in Indonesia.
Speaker: How does the Indonesian consumer deal with inflation, rising living costs, food prices in particular rising?
Speaker: How does that impact consumer spending in the country?
Speaker: So, I think that's quite a tricky situation because what happened was we started the year 2022.
Speaker: with a very low increase in wage growth.
Speaker: We are talking about probably low single digits level at the beginning of the year.
Speaker: And then starting February or March, we see a pickup in inflation.
Speaker: And we saw that customers started to prioritize primary needs, particularly around food.
Speaker: Now, the issue is currently not only are we seeing consumers prioritizing food products, the economy is also starting to reopen.
Speaker: And that means that school is back to in-person lessons.
Speaker: And so there are additional costs associated with attending schools in person, such as, for example, making sure that the kids are safe.
Speaker: presentable with uniforms that fit them, preparing a proper lunchbox.
Speaker: So we see that consumers are actually prioritizing these needs ahead of other more discretionary spending.
Speaker: Now, going into next year, we expect the situation to improve with wage increase.
Speaker: And it should be higher next year in 2023, considering that we expect GDP to rebound in 2023.
Speaker: And now the inflation is higher, wage increase should be better going into next year.
Speaker: But between, I think, right now and next year, there's still a few more months to go.
Speaker: And unfortunately, living costs may not come down fast enough.
Speaker: And as a result of that, we are seeing some pressures on consumer companies going into second half of 2022.
Speaker: Selfiana, Indonesians are avid users of social media, probably more so than other Asian consumers even.
Speaker: How does that impact the way they shop and where they shop and what they buy?
Speaker: Yeah, so we saw that some companies have started engaging customers by allowing them to pick up goods in store.
Speaker: That's what they call the click and collect function.
Speaker: They also allow customers to order through some sort of a chat channel.
Speaker: That refers to functions such as WhatsApp chat.
Speaker: They also allow for the delivery of goods to customers.
Speaker: So there are actually several ways that brick and mortar players evolve along with the recent development in consumer behavior.
Speaker: Silviana, a classic indicator for consumer spending in Indonesia is two-wheeler demand or motorcycle demand.
Speaker: And how has that been doing of late?
Speaker: Have we seen a pickup in motorcycle sales across the archipelago?
Speaker: Is there signs that consumers are more confident, have more purchasing power now?
Speaker: Yeah, I think if we look at motorcycle demand year to date,
Speaker: it's still down.
Speaker: It declined by about, I think, 9%, 10% so far this year.
Speaker: But that's not from a lack of demand.
Speaker: The issue is a supply-side issue rather than a demand-side issue.
Speaker: And at HSBC, we actually expect the demand to pick up in the coming months.
Speaker: I think another interesting point to note is probably the demand around four-wheelers.
Speaker: Demand for four-wheelers
Speaker: have been very strong since the beginning of the year.
Speaker: And this is probably indicative of the fact that the economy is recovering, people are more willing to spend on a new vehicle.
Speaker: One last question, Silviana.
Speaker: You've done some surveys, consumer surveys in Indonesia before COVID and after COVID.
Speaker: Well, no doubt there are some differences there, but can you maybe run us through some of the shifts that we've seen in consumer spending and consumer behavior over the last couple of years?
Speaker: Yeah, I think as you are aware, a lot of things have changed before and after COVID.
Speaker: For example, some types of expenses
Speaker: got cut while others saw an increase.
Speaker: So, for example, during COVID, people cut their spending on things like vacation and clothing and apparel, particularly those that's fashion related.
Speaker: But some other things, some other expenses such as vitamins and personal care and telco spending have seen an increase.
Speaker: I think what is also interesting is that when customers cut spending, customers tend to cut spending both online and offline.
Speaker: And when they are ready to spend again, the online spending tend to increase a lot more than the offline.
Speaker: That's one of the observations that we make at the beginning of COVID outbreak.
Speaker: The other thing as well that is worth mentioning is the willingness to pay for delivery fee.
Speaker: In the early part of e-commerce rollout, people were somewhat unwilling to pay for delivery fees in Indonesia, but over time that willingness grew and we expect this willingness to be somewhat sticky over the next few years.
Speaker: Harold, that was interesting what Silviana just said generally, but also specifically about how a demand for motorcycles in Indonesia is actually quite strong, but sales are not keeping up because there are supply side issues and there are just not enough motorcycles around to be sold.
Speaker: Well, what I found interesting is that she was talking about e-commerce.
Speaker: Indonesians, as we mentioned earlier on, they're very often stuck in traffic.
Speaker: They're eager consumers of all sorts of social media.
Speaker: And I can see that's
Speaker: not by stretch of imagination, that therefore there would be large consumers of anything that is online on offer as well.
Speaker: But Harold, we're not just here to talk about markets and economics, but also generally what's on our mind.
Speaker: And you're traveling now in Indonesia.
Speaker: What's the plan here?
Speaker: Well, I'm going to take the train from Jakarta to Surabaya.
Speaker: So one of the things on my mind is just to make sure that I got the right train tickets.
Speaker: But what is really on my mind is I'm going to holiday in East Java.
Speaker: visiting those temples.
Speaker: So I'm making my way through a book on Eastern Javanese temple art and history.
Speaker: It's kind of a quiet taste, I can see.
Speaker: Not everybody would be reading it, but I find it quite fascinating.
Speaker: And you, Fred, what is on your mind?
Speaker: Well, I'm dealing with more prosaic travel issues heading to Europe, actually.
Speaker: And we're worried about losing luggage.
Speaker: That seems to be an issue right now in Europe.
Speaker: But apparently these electronic tags you now put in with your luggage, you can track where your luggage is on the phone.
Speaker: And that would allow you to actually then see that your luggage probably shows up somewhere in Europe.
Speaker: in South Africa while you heading to Spain.
Speaker: So that's certainly advancement in technology.
Speaker: It won't give you luggage back, but it certainly helps you track where that suitcase ultimately ends up.
Speaker: So I'm currently just looking through the various options here and just trying to figure out the technology behind it and where to obtain these tags.
Speaker: Well, so far I've been lucky.
Speaker: I have not had any travel problems yet, but maybe that's something that I should be considering as well, given that I'll be traveling onwards to Europe later.
Speaker: Well, that's all we've got time for today, folks.
Speaker: Thanks again for joining us under the banyan tree.
Speaker: Hopefully we'll keep our luggage.
Speaker: And with that, thank you very much for joining us.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
