China’s retaliation measures have sparked concerns of a potentially intensifying trade war between the US and China. As this would only lead to a pyrrhic victory for the winner, we expect more opportune measures going forward. For Indonesia, net exports are not such a crucial component in GDP, but currency risk could derail the growth trajectory and dent confidence. We still prefer the domestic consumption related sectors.

The trade war saga continues

Following the US’s move to issue a list of Chinese imports subject to proposed tariffs, China has retaliated by announcing tariffs on 106 U.S. products. China will put a 25 percent levy on $50 billion of U.S. imports, including soybeans, corn, aircraft, cars and whiskey, a reciprocal measure in response to the US’s latest decision to impose tariffs of a similar scale on Chinese goods. This move has sparked major concerns in the global financial markets, especially on the possibility that the two countries would take further measures which would create significant uncertainty in relation to the global growth outlook.

More opportune measures are plausible

With China’s latest measures mostly directed toward the US’s main agriculture products, there could be a softening in the stance taken by the US government. Recently, President Donald Trump said that the US is not in a trade war with China, and the recent policies on tariffs are more to address the huge trade deficit and intellectual property theft. Similarly, the Chinese government appears to be willing to negotiate to resolve this issue. We believe that the continuation of a trade war would only lead to a pyrrhic victory for the winner, reducing overall global economic growth.

Currency volatility risk is the biggest threat at this stage

The direct impact on Indonesia’s economy appears to be quite limited, especially as domestic consumption is the largest contributor to the economy, with net exports only less than 3%. However, currency volatility is definitely affecting the economy, especially through corporates which still depend on raw material imports. Indonesia has a USD14.1bn trade surplus with the US, ranking it 15th, mostly from exports of clothing & accessories and footwear. We also believe that over the medium-term, if the tariffs on US soybeans were to be implemented, China would likely satisfy its edible oil needs by looking toward South American soybeans, EU rapeseeds and Asian palm oil, with higher demand for the latter being a positive for CPO prices over the longer run.

Maintain our index target of 6,854

We believe that there will be more opportune measures in relation to the trade war between the US and China, without putting too much risk on global economic stability. We still prefer sectors with a domestic related theme such as the consumer sector (staples, retail and media), banking and construction. Given the recent underperformance of the LQ45 index (a proxy to bigger cap and more liquid stocks), we add ASII to our list of top picks.

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