Analysts say stocks will rally during elections

Tony Hotland, The Jakarta Post, Jakarta

Stock analysts predict the current rally in the local stock market to continue during the upcoming general elections given the low interest rate environment and the fact that the stock index moved higher during the previous two elections.

Speaking at a seminar on the stock market on Tuesday, analyst Dandossi Matram said that the Jakarta Stock Composite Index could go beyond the 800 point level.

"It's quite hard to predict the index ... but it could probably go beyond 800 points," he said.

The local stock market has been in a rally mode over the past several months, with the composite index soaring to all-time highs in January.

Meanwhile, on Tuesday the index closed slightly lower, by 0.48 points, at 767.26 amid profit-taking by investors.

The current declining trend in domestic interest rates will push investors to seek alternative investments such as the stock market, as real interest rates received by bank depositors is already negative, if inflation and tax on time deposits are taken into account.

Dandossi also said that the general election does not necessarily mean a depressing period for the stock market despite the usually heightened political tension.

He pointed at the stock market rally during the previous two elections to illustrate his theory. During the presidential election in 1997, the stock index moved higher and reached a new high of 689.498 points. Meanwhile, during the 1999 election period, the index was also in a rally mode and closed higher at 686.947 when a new president was elected.

Greater volatility, said Dandossi, could possibly occur in the index during the campaign periods, but should end up at a higher point after each step in the election process was completed.

Indonesia will hold a legislative election on April 5, followed by a presidential election on July 5. A likely presidential run-off will be on Sept. 20. It will be the country's first direct presidential election.

Analyst Budi Ruseno said that the possibility of invisible intervention from political parties was also an element to be considered, although this would be difficult to trace.

Such intervention could be used as a sort of tool for any party that was confident of winning the election because a good performance by the bourse would give the impression of acceptance in the new government by both the domestic and international markets.

"We can't prove it, but we can sense it. For example, after Habibie was elected as president, the economic condition was a little better and investment existed. As we know, Habibie had many colleagues who had a heck of a lot of money to throw around, and it was similar case with Megawati," Budi said.

However, the analysts acknowledged that the rallying would continue assuming that the general election process runs smoothly.

"If the elections don't go well, the increase will probably be smaller. In 1999, when the situation was super chaotic, the index showed increases. Now, things are steadier and improved," said Dandossi.

Meanwhile, analysts Poltak Hotradero said that although the country's macroeconomic condition was improving, as evidenced by the lower interest rate environment, it was primarily due to external factors.

"The low interest rate is basically due to the low U.S. federal funds rate. The good news is that the United States won't likely increase the rate until early 2005 given their current enormous budget deficit," he said during the same seminar.

He said that the rally in the stock market does not necessarily mean an overall improvement in the real sector of the economy as investments by the corporate sector remain low due to various problems and uncertainties.