February 18, 2025

What to Buy When Interest Rates Are Cut

Market Commentary

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US headline CPI inflation rose to 3.0% YoY — up from the cycle low of 2.4% in September — while core CPI inflation rose a tick to 3.3% YoY. This, at glance is certainly not a good news as consensus expect that the headline inflation would be lower at 2.9%.

Core inflation has essentially been stuck at 3.3% for the past six months, creating distress for Fed policymakers. The annual revision to seasonal adjustment factors and relative weights did not lead to major shifts in inflation dynamics.

However, what some might have missed is that, shelter, which accounts for c. 30% of US headline CPI, has not been fully reflected due to the longer timeframe method of capturing the price. Shelter price which had declined, still recorded on a high level on January 2025 as there is lag on the recording.

US Headline Inflation Rate

In January 2025, Indonesia's annual inflation rate declined to 0.76%, a significant decrease from 1.57% in December 2024. This marks the lowest inflation rate since January 2000.

The primary factors contributing to this decline include government-implemented electricity tariff discounts and reduced airfare costs. These measures have effectively lowered consumer expenses, leading to the observed deflationary trend.

Overall, while Indonesia is experiencing a period of exceptionally low inflation, future projections suggest a return to moderate inflation levels as temporary measures conclude and economic conditions evolve.

Indonesia Inflation Rate

Indonesia's recent economic indicators suggest a stable outlook for the rupiah's exchange rate. In December 2024, the country recorded a trade surplus of $2.24 billion, with exports at $23.46 billion and imports at $21.22 billion.

This surplus, combined with a historically low annual inflation rate of 0.76% in Januray 2025, indicates manageable pressures on the rupiah's exchange rate.

Therefore, we believe that BI is likely to cut its BI7DRR by 25bps to 5.50%.

Should that happen, we believe JCI has a very high chance to have a strong bull run with foreign capital inflow coming back to Indonesia, which has started to be seen on the 17th February.

What may first experience the bull run is the big banks. For the past one year, Indonesia's big banks has experienced a significant decline which gives an interesting buying opportunity as the valuation is very undemanding.

Indonesia Big Banks 1 Year Performance

All things considered, on the back of both strong macroeconomic data and possible rate cut, we suggest investor to remain heavily invested to ride the bull run momentum. We recommend investor to put maximum weight on banking sector for the near term.

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