The 3 4Q earnings drivers, Sharpfokus65
Volatility
We wrote a couple of weeks ago about market volatility calming down. Well despite a few wobbles around the world, the JCI index has remained very steady & volatility has continued to calm down. 5 day average volatility is now zero. The stock market hasn’t moved in 4 moths after its fall. It’s more than ready to go up.
FX
$
This week we look at 3 things which will raise earnings in 4Q 2018 & what impact they will have. The first is FX. The rupiah has been very weak against the dollar, falling from 13,300 to 15,200. That’s had an impact on many companies especially those with $ debts whose earnings have declined from FX losses.
Pound
I think it’s time for the rupiah to strengthen again. For a couple of reasons. First, the $ doesn’t have underlying strength. It’s been weakening for 2 years. Second, the rupiah hasnt moved against other currencies. Our rate vs the £ is the same now as in March. It’s time to gain vs the $ too.
Gains
If we imagine a listed company which has a 100% debt to equity ratio, earns 20% ROE & has 10% of the debt in $ & let’s say the rupiah strengths back below 15,000 to 14,500 next 2 months. That would boost that company 4Q earnings by quite a lot. By my calculation about 15% compared to the 3Q.
Interest costs
Global rates
Second is interest rates. It seems reasonably clear that global interest rates are rising as the world economy starts to grow again, led by the US. This we’ve seen rising bond yields among the major markets. Indonesia has gone through a big economic wobble & when that happens our yields rise too.
Indonesian rates
But that’s because of currency weakness. As the currency strengthens , even while international rates rise, our interest rates should falll. That’s what’s happening. A year ago our 10 year bond yields were at 6.5%, recently they reached 8.6%. That’s almost a 30% increase in interest costs. But this month rate have fallen back to 8.3%.
Savings
Let’s say our theoretical company saw rates on the 90% of their debt in local currency go up to 11.5% recently & then let’s say rates now fall back to 10.5%. That would be enough to boost their 4th quarter earnings by about 5%. So the combination of FX regains & interest savings would lead to a 20% earnings gain quarter on quarter.
Pricing power
Loss
& there’s a 3rd way for earnings to move higher in the 4th quarter. As you can imagine, in the 2nd & 3rd quarters pricing power fell due to economic & currency weakness. This is particularly true for commodities. It’s a myth commodity prices are a hedge they follow the rupiah down. Now 4Q pricing power can rise again as the rupiah strengthens.
Regain
This could be further boosted if the fuel subsidy is reduced & oil prices allowed to rise which would allow other prices to rise. It’s also possible that the government may see sense & reduce taxes to spur business, which would also increase pricing power. Cutting the palm oil export tax would be one example.
Gains
A return of pricing power would give the biggest benefit to earnings & cause an even bigger jump in the 4Q (& of course beyond). In the example of our theoretical company if they gave a 7% mating & get a 1-2% increase in purchasing power that would add another 15% to the profit. So a total of 35% jump in 4Q earnings.
Valuation
Gains from FX, lower interest costs & a return to pricing power could boost stocks this Q & I tot the 1st quarter. This works best for those companies with leverage, $ debt & commodity related, but it will benefit all in some way. Equity being equity there is also a valuation effect, so you could be looking at some very big gains.
Have a great weekend!
Sebastian
We wrote a couple of weeks ago about market volatility calming down. Well despite a few wobbles around the world, the JCI index has remained very steady & volatility has continued to calm down. 5 day average volatility is now zero. The stock market hasn’t moved in 4 moths after its fall. It’s more than ready to go up.
FX
$
This week we look at 3 things which will raise earnings in 4Q 2018 & what impact they will have. The first is FX. The rupiah has been very weak against the dollar, falling from 13,300 to 15,200. That’s had an impact on many companies especially those with $ debts whose earnings have declined from FX losses.
Pound
I think it’s time for the rupiah to strengthen again. For a couple of reasons. First, the $ doesn’t have underlying strength. It’s been weakening for 2 years. Second, the rupiah hasnt moved against other currencies. Our rate vs the £ is the same now as in March. It’s time to gain vs the $ too.
Gains
If we imagine a listed company which has a 100% debt to equity ratio, earns 20% ROE & has 10% of the debt in $ & let’s say the rupiah strengths back below 15,000 to 14,500 next 2 months. That would boost that company 4Q earnings by quite a lot. By my calculation about 15% compared to the 3Q.
Interest costs
Global rates
Second is interest rates. It seems reasonably clear that global interest rates are rising as the world economy starts to grow again, led by the US. This we’ve seen rising bond yields among the major markets. Indonesia has gone through a big economic wobble & when that happens our yields rise too.
Indonesian rates
But that’s because of currency weakness. As the currency strengthens , even while international rates rise, our interest rates should falll. That’s what’s happening. A year ago our 10 year bond yields were at 6.5%, recently they reached 8.6%. That’s almost a 30% increase in interest costs. But this month rate have fallen back to 8.3%.
Savings
Let’s say our theoretical company saw rates on the 90% of their debt in local currency go up to 11.5% recently & then let’s say rates now fall back to 10.5%. That would be enough to boost their 4th quarter earnings by about 5%. So the combination of FX regains & interest savings would lead to a 20% earnings gain quarter on quarter.
Pricing power
Loss
& there’s a 3rd way for earnings to move higher in the 4th quarter. As you can imagine, in the 2nd & 3rd quarters pricing power fell due to economic & currency weakness. This is particularly true for commodities. It’s a myth commodity prices are a hedge they follow the rupiah down. Now 4Q pricing power can rise again as the rupiah strengthens.
Regain
This could be further boosted if the fuel subsidy is reduced & oil prices allowed to rise which would allow other prices to rise. It’s also possible that the government may see sense & reduce taxes to spur business, which would also increase pricing power. Cutting the palm oil export tax would be one example.
Gains
A return of pricing power would give the biggest benefit to earnings & cause an even bigger jump in the 4Q (& of course beyond). In the example of our theoretical company if they gave a 7% mating & get a 1-2% increase in purchasing power that would add another 15% to the profit. So a total of 35% jump in 4Q earnings.
Valuation
Gains from FX, lower interest costs & a return to pricing power could boost stocks this Q & I tot the 1st quarter. This works best for those companies with leverage, $ debt & commodity related, but it will benefit all in some way. Equity being equity there is also a valuation effect, so you could be looking at some very big gains.
Have a great weekend!
Sebastian