Frank van Lerven, Jakarta
In my New Year’s article for 2007, I questioned whether the good returns on stock markets, experienced since 2003, could continue. While, indeed, U.S. and European markets produced little growth, this was not the case at all for the Indonesian stock market.
By mid-December 2007 the Indonesian stock market (JSX) clocked in a staggering return of 54 percent for that year. The JSX, like the Chinese and the Indian stock markets, did not follow the trend of the U.S and European markets, which were weighed down by the sub-prime mortgage crisis. The saying “When Wall street sneezes, Asian markets catch a cold” was clearly not true for 2007. The comparative data, year to date, are listed below:
So, where do we go from here? What should be done by investors in the JSX who have been taking part in this great four year run? What about new investors?
Many people will experience an acute sense of nervousness when looking at the steep slope upwards, representing the growth of the last four years. Can the market really go higher? And is not it true that ‘what goes up, must come down?’
Actually, when it comes to equity investments — where investors participate in the growth of companies — there is no inherent reason for stocks to ‘come down’. However, what is true is that, over time, the annual growth in stocks tends to come to a certain “mean” — a mean which may well be higher for the smaller, developing markets in comparison to that of developed markets.
It is therefore necessary to bear in mind, when looking at JSX’s annual returns of 61.5 percent per year for the last four years, that these returns are multiple that of the historic average annual growth figures of stock markets which are in the range of 10-12 percent p.a..
With this in mind, one should expect that these high annual growth figures will not continue, and if they do, they may come at the price of sharp down turns.
Nonetheless, looking at the Indonesian market for the year 2008 from a domestic perspective, there are, in fact, a number of bullish factors to support the JSX’s rise to even higher levels than where it finds itself today.
The Jakarta Stock Exchange, under the leadership of its president, Erry Firmansyah, has continued to work hard to both further modernize its procedures as well as to improve its image at home and abroad. One of the achievements is the recent merger of the Surabaya and Jakarta stock exchanges (into Indonesia Stock Exchange), as of Dec. 1, 2007. This merger will also further enhance the trading in derivatives, adding to the market’s efficiency.
In an economic climate that is showing clear signs of improvement, 6.3 percent growth in 2007, and with political stability continuing, there is more confidence, both at home and abroad, to invest in Indonesia. At home, the financial services industry is burgeoning, trying to capture the potential of affluent Indonesian investors. Perhaps percentage-wise affluent Indonesian investors represent a small part of the population, but out of 240 million inhabitants, the actual numbers are huge.
And, so it is that a staggering number of 45 new mutual funds are set to start operating in 2008. These are expected to raise the capital invested in the Indonesian stock market in 2008, by mutual funds, from Rp 87 trillion to Rp 150 trillion — a rise of 84 percent. The volume of the Indonesian stock market is still low, compared to other Asian markets, and this influx of new mutual funds could raise the trading volume.
If indeed, Ken Fisher (writer of the prestigious “Portfolio Strategy” column in Forbes Magazine) is right that one of the main drivers of stock markets is “supply and demand”, the outlook for the JSX for 2008 is excellent.
In addition, there is another positive factor: plans of the government for new tax rates, resulting in tax reductions for investors by 5 percent (tax incentives tend be supportive of stock growth).
However, there are also challenges presented by the domestic front. Indonesia is a net oil importer, and with oil prices as high as they are, inflationary pressures may increase. Note: The government’s budget is based on an oil price of US$60. Increasing economic growth could be another contributor to higher inflation. Higher inflation could trigger off a hike in interest rates (mostly not good for stocks and not good for bonds).
Perhaps the biggest factor though, challenging the good prospects for 2008, is the fact that the Indonesian capital markets do not operate in a vacuum.
International investors still make up two thirds of investors in the JSX. If indeed the U.S goes into recession (by analysts now seen as having a 50-50 chance), and markets in the U.S and Europe go down, the Indonesian stock market could well be affected. Investors who experienced the huge dips of 1994 and 1997, will remember that Asian markets doubled or tripled the downturn, in the same way they had doubled or tripled the rise before...
So, what should investors do?
For now, looking at the stock and bond markets, investors are best to focus on how to deal with the stock market. The way to tackle this question is to establish what kind of investor you are.
Different strategies apply, depending, whether, broadly speaking, you fit in any of the following three categories:
• Monthly investors (in savings plans, pension plans and unit-linked insurance plans).
• Capital investors who have been in the market for the last couple of years.
• Capital investors who are first time investors.
Monthly investors: Do not change anything, unless you are at the end of your investment term (generally 10 years plus). If you are in the last year of your investment term and need the saved capital, consider switching all equity holdings into fixed interest. You then realize and safeguard your profit. If you are starting your savings plan or are in the middle of the term keep going!
Existing capital investors: If you invested capital between 2003-2006 and you need this money in the next one or two years, consider selling and realizing your gains. Count your blessings: you had a great run. If you are a long term investor you can stay invested, but be prepared as it is most likely that you will experience down turns and annual returns will certainly be lower than what they have been in the last couple of years.
New capital investors: Accept that timing the market is impossible. If you can take the long term view (at least 5 years + or preferably 10 years +), you can invest now. However, manage your expectations.
One last comment, regarding diversifying in global stocks: Indonesia is rated B to BB- by rating agencies such as Standard & Poors and Moody’s for creditworthiness, so there are risks involved just investing in the Indonesian market. This makes a strong case for global diversification. In the last two decades there have been plenty of Indonesian or Asian specific events of a crisis nature. However, looking at 2008, it may be one of those years where the spoilers may come from outside Indonesia. So, being overweight in Indonesia for 2008 may be a sensible strategy.
The writer is a Certified Financial Planner professional.
