A year of ups and downs on the stock market

By Sigma Batara Research

JAKARTA (JP): The stock market started the year bullishly with the Jakarta Composite Index (JCI) surging from a 453 low in Nov. 20, 1995 to a 630 high on April 24, 1996.

In between, it experienced two major corrections. The first correction of 8.7 percent (from 592 to 544.5) occurred from March 4 to March 11. It was triggered by a declining trade surplus and a higher-than-expected February inflation rate. Later that week, along with most regional markets, it followed the U.S. stock market plunge after high U.S. unemployment created uncertainty over a possible U.S. interest rate cut.

But the index rebounded just as quickly. It was back to 587.3 by March 19. The second correction occurred in the first week of May with the market falling from 629.5 to 599.7. This was triggered by the weekend's death of First Lady Tien Soeharto. Later that week, a U.S. market correction because of better-than- expected U.S. GDP growth also affected the local market.

Bearish sentiment hit the market in June because of several domestic events. Investors sold out of the secondary market to subscribe to the first wave of initial public offerings on the primary market. This brought the market down more than 40 points from 625.

The market rebounded 25 points by the end of June before worry about President Soeharto's health in early July brought the market down 25 points. In late July, there was more selling after the July 27 riots in Jakarta.

Down 50 points to 533, the market swung back and forth wildly between 560 and 533 before moving into a narrow range around 550 in early September.

The market rebounded in September. The JCI rallied from 550 in mid-September to 590 in early October. The expectation and realization of unchanged U.S. interest rates was a major force behind the bullish sentiment.

The following week the index dropped to 570, before rallying at the end of October to a 620 high because of favorable regional sentiment caused by expectations that U.S. interest rates would stay flat in the long term.

After a small correction the market rallied again, passing the year high of 630, spurred by BNI's listing, the year's only privatization.

After some small corrections, the market is expected to end the year at around 630.

Fundamentals

After experiencing 8.1 percent growth in 1995, gross domestic product (GDP) is set to grow more slowly. The figure has raised fears of an overheating economy. The government has subsequently tightened its rein on the economy mainly through contractionary monetary policy. We project 7.5 percent growth in 1996 and 7.4 percent in 1997.

Tight monetary policy kept domestic interest rates high in 1996. We project deposit interest rates will stay at 17.3 percent until the end of the year. In 1997, the following factors will affect interest rates:

1. The possibility of an interest rate rise in the U.S. will put upward pressure on Indonesian interest rates.

2. Reduced inflation in 1996 will decrease inflationary expectations in 1997, putting downward pressure on domestic interest rates.

3. Warming political pressure (during election time in May 1997) will slightly raise country risk.

In our opinion, interest rates in 1997 will stay about the same as in 1996.

Tight monetary policy in an open economy like Indonesia's creates significant capital inflow to take advantage of high interest rate differentials. A large supply of the U.S. dollars has appreciated the rupiah against the American greenback. This situation has occurred since March 1996.

* Bank Indonesia, the central bank, has refused to intervene in the foreign exchange market. This move is consistent with its effort to cool the economy (but detrimental to export competitiveness).

* By the end of 1996, we think exchange (spot) rates will be Rp 2,350/US$. At the end of 1997, we project the exchange rate will be Rp 2,470/US$, implying 5 percent depreciation. This will compensate slow depreciation in 1996 and maintain the competitiveness of exports.

In 1996, the balance of payments will deteriorate further, albeit more slowly. We project a current account deficit of US$ 9.1 billion in 1996 (4.23 percent of GDP) but a much improved deficit of $6.8 billion in 1997 (2.88 percent of GDP).

Investment Outlook

Next year the market should perform well with the economy growing more than 7 percent and inflation remaining below 7 percent. Domestic interest rates are expected to drop at least in the first-half of 1997. U.S. interest rates are expected to stay unchanged for some time. Indonesian privatization will always be the focus of attention. We expect Jasa Marga, Aneka Tambang and PLN subsidiaries to be floated next year.

The stock market is also trying to improve. Next year the Jakarta Stock Exchange is expected to go scriptless. This should improve liquidity and reduce administration costs. We also see more domestic investor, retail and institutional participation. Retail transactions will be boosted by margin trading, while institutional transactions will be boosted by the newly formed open-ended mutual funds.

But any negative political or social development could spark a market plunge. This is particularly relevant next year with the general election on May 29, 1997.

A careful investment strategy is therefore warranted, although investment in Indonesia remains attractive.

But the political situation in the short-term may cause market volatility. For 1997, we recommend avoiding politically sensitive stocks. You should invest in stocks that will benefit from domestic economic growth and have minimal political risk.

Table: Economic Figures and Forecasts

1994 1995 1996F 1997F Growth (%) GDP 7.3 8.1 7.5 7.4 Private Consumption 5.8 6.2 6.0 7.0 Govt Consumption 2.9 6.4 4.9 5.0 Investment 15.4 23.9 6.7 14.5 Exports 7.3 13.39 14.0 10.0 Imports 13.3 24.6 18.6 16.7

Population & Income

GDP (US$bn) 171.52 192.98 214.73 235.69 Population (m) 191.8 195.6 199.5 203.9 GDP per capita (US$) 894.3 986.6 1076.3 1155.9 Inflation (%) 9.4 8.64 6.9 7.3

Financial Indicators

Exc. Rate (Rp/US$) 2200 2308 2350 2470 Commercial Bank Time and Saving Deposit rate (average %) 14.34 16.72 17.34 17.34

External Trade (US$bn) Goods Exports 40.2 46.0 50.6 55.7 Goods Imports -32.3 -40.6 -46.3 -51.4 Trade Balance 7.9 5.3 4.3 4.3 Current Account Balance -2.9 -7.5 -9.1 -6.8