Liquidity problem still hinders capital market

Liquidity problem still hinders capital market

JAKARTA (JP): Several panelists at a conference here hinted
yesterday that poor liquidity will remain a major problem
hampering the growth of the Indonesian capital market due to a
lack of large free floats and domestic investor participation.

The problem becomes more complicated because most leading
brokerages operating in the country are joint ventures focusing
their services on foreign-based institutions only, while domestic
brokerages are hesitant to expand their distribution networks
throughout the country.

The president of the Jakarta Stock Exchange (JSX), Cyril
Noerhadi, disclosed that the exchange's management company and
the capital market authority are now preparing several programs
to mobilize more domestic investors.

Cyril said that several programs are under preparation,
including scripless trading and remote trading systems, which are
expected to be in operation by 1998.

He also noted that the implementation of the Jakarta automated
trading system since May last year is also aimed to boost
liquidity.

"We, however, realize that the fundamental challenge for the
growth of our market is how to improve public awareness," Cyril
told the two-day discussion on "Opportunities and Challenges of
the Indonesian Capital Market".

The discussion, which was attended by more than 900 executives
of securities houses and listed companies, also featured Peter
Burnett from Union Bank of Switzerland, Henny Sender from Far
Easter Economic Review and Belinda Tan from Waterfrot Securities
of Malaysia. The meeting will end today.

Burnett focused his presentation on the importance of quality
shares issued to attract institutional and retail investors.

He said that a quality issue could be viewed on the basis of
its offering size and the ability to trade on the secondary
market.

Burnett argued that it was only limited stocks on the JSX that
enjoyed high daily turnovers with active participation from
foreign institutions.

He said the 20 largest shares on the JSX currently account for
60 percent to 70 percent of the exchange's daily turnover. The 20
stocks' market capitalization also account for more than 60
percent of the JSX's total market capitalization.

This suggests that the 228 other companies do not enjoy the
JSX's high daily turnover.

Burnett, therefore, noted that the ability to trade is more
important than the size of the share issues.

Burnett and Belinda Tan, however, viewed that Indonesia has
the capacity to be the largest market in Southeast Asia due to
its solid base of institutions and the growing number of middle-
class people.

He is optimistic that in the short term foreign institutions'
capital will still flow into Indonesia, while in the long term
domestic institutions, particularly mutual funds, will bring
large capital to the equity market.

Burnett, however, did not specify if the expected
participation of mutual funds was a key factor in boosting market
liquidity.

Cyril was also uncertain if the exchange's programs would
eventually solve the liquidity problem completely.

Tan suggested that Indonesia's capital market would strongly
grow in the future with the help of sub-brokers.

"The large part of the success of Singapore's and Malaysia's
retail markets arrives from sub-brokers," Tan argued.

Sub-brokers or agents, according to Belinda, have been in
operation in the two countries for almost 20 years.

Tan also said that the establishment of sub-brokers is not
expensive.

A participant from Australia, on the contrary, argued that
what should be done by the JSX is to encourage its members to
merge in an effort to provide better services to both foreign
institutions and domestic retailers.

Meanwhile, businessman James T. Riady from the Lippo Group
told reporters most foreign investors buy shares of Indonesian
companies on a bottom-up approach.

James said that in a bottom-up approach, the major
consideration for an investor's decision on whether to buy or
sell stocks is a company's fundamental factor, not macroeconomic
or political situations.

Based on such an assumption, James is optimistic that
Indonesia's capital market will be able to grow further in the
future because foreign investors will prefer long-term oriented
investment. (alo)