Stocks shine as mutual funds collapse

Rendi A. Witular, The Jakarta Post, Jakarta

The Jakarta stock market is in for another shining year this year, hitting record highs along the way, driven in part by the influx of investors from the bond and mutual fund markets as a result of their declining yield due to various economic factors at home and overseas.

With a high interest rate environment in the global market and at home amid worrisome inflationary pressures, investment instruments which boast yields from interest-rate spreads are no longer eagerly hunted by investors.

Trading in the equity market started to flourish early in the year, on confidence over the new administration under President Susilo Bambang Yudhoyono, which took over in October, 2004.

The market started to get a boost from the external front when in the first quarter of this year, investors began to looking at equity investment or dollar-denominated assets following a steady increase in the interest rate in the United States.

Bank Indonesia later tracked down the trend and gradually raised its key interest rates, undermining demands for fixed- income investments, such as bonds and mutual funds, with most of the investors eventually turning to the equity or money market which offer higher yields.

The jitters were also exacerbated by the unstable monetary condition resulting from higher global oil prices which put the country's fiscal balance under serious threat.

The impact was apparent on the mutual fund market in March when investors started to suffer from a decline in their investable funds, especially in fixed-income investment instruments, which is the underlying instrument in the industry.

Fixed income instruments account for the lion's share of the country's mutual fund industry composition.

Institutional investors, who are fully familiar with the risks, began withdrawing their investments and shifting them to either the more lucrative equity or money markets.

This was not the case for most retail investors, however, who later blamed their fund managers for not adequately informing them of the dangers lurking ahead. Most of them had to contend with the fact that -- in contrast to what their fund managers had told them to the effect that mutual funds were more or less like bank deposits: risk-free investments with fairly good returns -- their investments were in fact declining rapidly in value.

In just six months, the level of investable funds in the industry has plunged by some 45 percent, while net asset value (NAV) has nose-dived by 60 percent.

The amount of investable funds in the industry had declined to less than Rp 65 trillion (US$6.56 billion) from Rp 118 trillion in March as of the first week of September, according to the Capital Market Supervisory Agency (Bapepam).

Meanwhile, the industry's NAV dropped to Rp 46 trillion in the first week of September from Rp 105 trillion in March.

During the apparent collapse in the bond and mutual fund market, trading in the equity market continued to flourish as it booked another record high in history when the Jakarta Composite Index closed at 1,192.203 on Aug. 3.

Until that date, the Index had increased by close to 20 percent from 1,000.88 points booked in the first day trading of the year.

Still, in regulatory terms, the robust trading performance has not been supported by sufficient incentives as well as favorable policy to lure more private companies to "go public" and make the capital market among the main financing resources in the country.

As such it makes it difficult for the local bourse to become a major source of financing, outside of banks and other investment tools, said chairman of the Indonesian Publicly Listed Companies Association (AEI), Airlangga Hartarto.

"The government is giving the same treatment to publicly listed firms as it is to those that are not listed. This discourages more firms from improving their corporate governance by going public," he said.

The absence of incentives -- with tax-break facilities the most sought after -- has led the Jakarta Stock Exchange (JSX) to lower its ambitious target for the registration of new listed companies this year from 30 to just 15.

There were eight new companies listed on the JSX from January to September, with another seven expected to follow suit.

At present, there are 337 companies listed with the bourse.

There are also concerns that several of the existing listed companies will buy back their shares from the public and become private companies, in part because being a listed company means more paperwork and costs.

In order to attract non-listed companies to going public, AEI is suggesting that the government provide fiscal incentives in the form of a tax clearance facility and an income tax break ranging from 5 percent to 10 percent.

The association is also demanding the government allow public accountants to audit the taxes of the publicly listed companies without having to go through another audit by the Directorate General of Taxation. AEI also appeals to the government to drop plans to tax mutual fund proceeds, as included in the proposed amendment of the tax laws which are currently being deliberated upon by the House of Representatives.

In the regulation sector, AEI urges Bapepam to reduce an effective approval for an initial public offering (IPO) and for other forms of capital-raising corporate actions from 45 days currently to 30 days.