Edging toward recovery
By Berni K. Moestafa
After a disappointing 2000, and an unpromising start this year, equity analysts regained some confidence in the local stock market after its turnabout on the back of foreign capital inflow. The analysts said the overall prospects had improved, but political instability and a weaker rupiah could impede the recovery. The Jakarta Stock Exchange's Composite Index has bottomed out and there is only a slim possibility that it will make another dive like the one last year, according to them. What else?
JAKARTA (JP): "Unless we see violent riots in Jakarta, there isn't much more that can drive the market further down," analyst Martin Pangabean of Bank Mandiri said.
According to him, any political development that affects the market will be positive, fueling the market up.
Political risks, he said, had already been factored in by most stock investors. "I don't believe political developments are driving the market now. Yes, there is uncertainty but we have been going through it since 1998," Martin explained.
He, however, said that although the outlook showed an improvement, trading would still be limited to certain stocks, particularly blue chips, which had been the dominant factor in the recent surge of the index.
"These (blue chips) are the ones that have been driving the stock market the past years," he added.
The JSX Composite Index has been hovering at the 400 level for the past few months. Martin described the market's current level as its support level, from where it could not weaken further.
His optimism comes after the stock market took a severe beating last year when political developments went in the opposite direction that investors had expected.
Hopes of economic recovery were running high when President Abdurrahman Wahid was elected in late 1999. The market burst into the year 2000 at a peak level of 700 in January.
Yet the newly elected President has failed to deliver the much awaited stability, and he has instead been often criticized for his controversial statements which created political instability.
The short-lived euphoria in the stock market sent the JSX Composite Index spiraling down, loosing some 30 percent in value by the end of the year 2000
But with the market at its bottom, Martin continued, foreign capital inflow this year could kick off the JSX's recovery.
"Precisely because foreign investors are rare now, their entrance, no matter how small, will give a big boost to the market," he explained.
At present, however, a slow down in the global economy will unlikely trigger any immediate capital inflow in Indonesia.
Martin said the United States' economy showed signs of invigorating after some periods of slowdown. The slight growth in the U.S. consumer confidence recorded last month, suggests the country may dispel a recession. Though the same cannot be said in other parts of the world.
Japan signals that the worst has yet to come. Falling consumer prices has eaten into corporate profits and the country's jobless rate stands at a postwar record.
Martin was nonetheless sure the global economy would turn around in the second half of this year.
"What isn't reflected yet in the JSX are global sentiments; they will catch up," he said.
He then referred to Thailand and the Philippines' stock markets, which had rebounded by about 21 percent and 9 percent respectively.
The two countries' markets got a boost from their peaceful transition of power in January.
Martin however said a sudden power shake up in Indonesia might not guarantee the stability needed to duplicate the rebound in its two neighboring markets.
"Anyone who comes to the top (presidency) will need to make compromises, those who are left out in the compromise will continue to shake the government and cause instability," he explained.
He admitted that foreign investors might keep their distance from the local market because of political uncertainties. But local investors, he added, had long adapted themselves to these prevailing circumstances.
He reiterated his confidence that the unruly political development would not hurt the market as it had before.
"I can still make money in this situation, I don't see why foreign investors haven't realized the same thing," he said.
Martin expected the JSX Composite Index to end the year at around the 500 level.
Adrian Rusmana of BNI Securities shared Martin's optimism for a bullish year, saying foreign capital was already entering the market.
"I've seen foreign investors coming in since November last year," he said.
Adrian said foreign investors were lured into Indonesia because of the low stock prices.
Last year, he said, foreign capital made about 20 to 25 percent of the stock market.
"For this year, I estimate foreign investors' share to grow 35 percent to 45 percent," he said.
Adrian explained that foreign investors were now eying Indonesia due to its undervalued stock markets.
According to him, because of its low prices, the JSX offers one of the highest earning growth potentials in the region.
"The JSX had been already gaining ground in the past few months until the Sampit incident stopped the trend," he said.
He was referring to the more than two weeks of ethnic clashes in Sampit, Central Kalimantan, that had left hundreds of people dead.
The violence also knocked the rupiah to its lowest level in two years, stirring fears that the currency could soon break the 10,000 level against the greenback.
Rupiah
If the rupiah stabilizes between the 9,000 and 9,500 range, the JSX will rebound and can even reach the level of 550, Adrian said.
Concerns of foreign exchange losses can drag share prices down this year, he added.
On Friday, the rupiah broke the psychological barrier of 10,000, the lowest level in 29 months, as the pressure for the President to resign mounted.
Currency analyst Pardi Kendi at Bank Buana said the rupiah might further slip to below 10,000.
"It will depend on whether the monetary authority can continue intervening in the market," Pardi said. He said given the still volatile political condition, the rupiah would remain vulnerable.
Fundamentally, he said, the rupiah was undervalued, but its current level reflected the country's political risk.
He said investors feared the brawl between the political elite would spread to the masses.
"Political quarrels among the elite are normal, but it will get dangerous if the grassroots pick up the fighting," he said.
In the short-term, Pardi sees no signs for the rupiah to strengthen.
Another danger, he added, was the presence of the nondelivery forward market (NDF) in Singapore.
The NDF market was created to get around a recent ruling by Bank Indonesia that limits offshore trading of the rupiah.
The ruling is intended to curb speculation against the local unit by tightening the outflow of the rupiah for noninvestment purposes.
With the NDF market, offshore speculators can still trade rupiah by settling their transaction in U.S dollars. This eliminates the need for an offshore rupiah supply.
Analyst said the rupiah exchange rate indicated in the NDF market could psychologically influence local players as they looked up to the NDF market for clues.
Albeit small in its current transaction volume, the NDF might provoke companies here to dump the rupiah in favor of U.S. dollars.
"Transaction volume doesn't matter. When people here are hooked to the exchange rate in the NDF market, the rupiah is in danger," he explained.
Equity researcher Irma Stamboel of PT Danareksa Sekuritas noted that Indonesia's high dependency on imported raw material, would cause the rupiah's weakness to filter through to the second half.
Outstanding U.S. dollar corporate debts of about US$8.2 billion this year, pose yet another threat to the local unit, she added.
Irma also pointed out that the JSX might face an oversupply of new equity in the market.
According to her, the private sector has plans to raise Rp 4 trillion (about $408 million) to Rp 5 trillion in funds through the stock market.
This year alone the Indonesian Bank Restructuring Agency (IBRA) is aiming to earn Rp 9.9 trillion from divestment of assets, strategic investors or the stock market, she said.
At the same time, she went on, a surge in the bond market is squeezing the demand side.
"Competition for funds from the fixed income market is high, with an estimated Rp 9 trillion in bonds planned to be issued this year," she said.
The JSX, on its part, is anticipating this oversupply by pushing for the participation of local investors.
To attract more local investors, the JSX management is preparing to introduce remote trading in August.
Under a remote trading system, traders from outside Jakarta can access the stock market and execute on-line trading.
With remote trading, the exchange expects more regional investors to trade at the JSX.
However, Irma added that demand for equity was very much "hostage" to the current political situation.
She advised investors to refrain from speculating by holding on to stocks that were less affected by market sentiments.
"Given Indonesia's current risks, we are more in favor of a defensive strategy, that is to be exposed to a sector which is relatively resilient to the current investment climate," she said.
According to her, shares of consumer-based producers such as cigarette, food and pharmaceutical companies, offer that protected niche.
The consumer sector, along with the building material and the telecommunications sector also promise higher than average earning growths, she explained.
"The key to investing in Indonesia's equity market has always been selectivity. Focus should be on stocks with large market capitalization, ample trading liquidity and prospective growth outpacing that of the market, or adopt a defensive strategy, namely consumer stocks."
Adrian voiced a similar opinion, but warned that not all shares in the consumer retail sector were good.
With a few exceptions, he said, retail companies were facing stiff competition from invading foreign retailers.
"(Ramayana) is a good choice, the company has strong operations, no debts and is virtually untouchable to foreign retailers because it operates on the outskirts of cities," he added.
Adrian also warned against making long-term investment given the uncertain business climate.
"Nothing is long-term in Indonesia, about one year should be enough," he said.