Prudential's Indonesia business enjoyed an asset rise of 6% in the second quarter following gains in local and overseas stock markets, helping claw back some of the losses it suffered during the first three months of 2020. However, it has had to adjust its strategy again as a new round of lockdowns in the capital Jakarta threatens to put more downward pressure on the life insurer's portfolio.
The value of the Prudential Indonesia’s assets dropped by close to one fifth from IDR80.7 trillion ($5.81 billion) to IDR65.3 trillion in the first quarter of 2020, and then climbed 6% to IDR69.2 trillion as of June’s end.
Chief investment officer Novi Imelda told AsianInvestor that Prudential Indonesia implemented a number of strategies to minimise customers’ investment volatility in light of the impact of Covid-19. It did so with the help of Eastspring, the asset management subsidiary of Prudential Corporation Asia.
In terms of the local equity portfolio, the insurer opted for sectors that are resilient amid an economic downturn, including consumer goods, healthcare, telecommunications and banks.
Imelda said the firm has exposure to local banking stocks, which are an oligopoly in Indonesia.
“Although banking stocks are largely considered cyclical, in the case of Indonesia, the four largest banks dominate the market with a net interest margin before the pandemic of around 4% to 5%, which indicated a strong position,” she said.
The share price of one of the biggest domestic banks, Bank Rakyat Indonesia, for example, rose by over 30% between March’s low and September 10. However, the share price is still in negative territory for the year-to-date, lying 28% below the start of year price.
The firm also invested, through Eastspring, into offshore equities, which are primarily focused on the information technology and healthcare sectors.
Overall, 51% of its IDR61.01 trillion of investment funds were allocated to equities as at the end of June. This high level is down to the fact most of its products are unit-linked, which let customers choose their own fund allocations.
However, Prudential Indonesia's portfolio strategy will likely face challenges as the country has taken a U-turn in opening the economy following a surge in Covid-19 cases. At the same time, the global stock market has been shaken after last week’s tech-stock sell-off.
Jakarta governor Anies Baswedan announced on Wednesday (September 9) that the city would be under lockdown again as a result of the country's struggle to contain the spread of the virus. Local cases reached over 203,342 as of September 9.
The sell-off that dragged down major US technology stocks as well as the Nasdaq composite index late last week has also led regional equity markets to give up some gains from their recent rally. The Indonesian equity benchmark, the Jakarta Stock Exchange Composite Index (JCI), fell 5.18% on Thursday (September 10).
“Broadly, the recent sell-off reflects an accumulation of investor worries centred on the performance of technology and growth stocks, which has reverberated through global equity markets,” said Kerry Craig, global market strategist at JP Morgan Asset Management.
FOCUSING ON FIXED INCOME
That said, Indonesian insurers have a relatively high exposure to government bonds. The country’s benchmark 10-year government bond yielded 7.05% as of September 10, while 10-year US treasuries yielded 0.71% as of September 9.
“As for bond investment funds, we focus on government bonds that are fairly liquid as well as shorter durations for our portfolios to reduce the uncertainty,” said Imelda. She added that the firm remained focused on fixed income as inflation is still low, standing at 1.32% year-on-year.
Prudential Indonesia is not the only firm seeking higher fixed income exposure to protect against volatile equity markets. AsianInvestor understands that domestic lifers are generally looking to allocate more assets to local government and corporate bonds.
And further shifts could come into play, given that Indonesia looks set to experience further pain in its efforts to limit the latest Covid-19 outbreak. Indonesia’s finance minister in August revised down the forecast for the country's GDP growth this year to between a 1.1% contraction and a 0.2% growth.
While Imelda admitted that Indonesia’s economic and business landscapes could well struggle in ther shorter term, she said the country’s macroeconomic conditions “are still quite strong with a stable long-term outlook, sustained by domestic consumption”.
Article updated to clarify that the majority of Prudential Indonesia's high equity investments are down to customer choices.