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)