Where to put your money in 2006

Frank van Lerven Jakarta

It is never easy and straightforward to answer the question "where to put your money?". Certainly right now, with the year 2005 ending and 2006 around the corner, it is a very interesting question as regards the Indonesian financial markets!

Will the bull run that the Jakarta Stock Exchange (JSX) has enjoyed for an unprecedented 3-1/2 year period come to a halt? And worse still, turn into a steep bear-drop, as has happened so often in the JSX's 28-year history?

Will fixed-interest markets experience another crisis, caused by interest rates rising further and investors cashing out of bonds, opting for time deposits instead?

Or will the JSX build on its resilient and strong finish of the year (at the time of writing the JSX has reached an all time- high) and bond prices go up again, because interest rate hikes have peaked or are close to peaking?

I will come straight to the point. I predict that the JSX, now trading at 1150, will reach 1300 by the end of 2006 and one-year time deposits, now at 12 percent, will drop to under 10 percent by the 2006 year end.

* Speculators (people who can afford to lose all the money they have invested): Continue with your investment in a diversified JSX portfolio or broad-based JSX fund. You can stay fully invested (with this speculative money). Being invested in a JSX group of stocks is as good a bet as any. You can add more money if you want to.

* High-risk, high growth investors (people who want growth, can tolerate steep downturns, but do not want to lose their shirts): stay invested and perhaps add more. However, decide now on a JSX level at which, if the market starts to drop, you will sell and take your profits.

* Medium-risk investors (people who are interested in moderate, solid growth without too much volatility), take your profits, if you have made profits in the JSX over these last 3 years, and park this money in a 12-month deposit account earning 12 percent. If my prediction is right, the capital you leave in the market will still pick up all the growth of the JSX and the profits taken will earn 12 percent, a very nice return.

* Low-risk investors (people who do not want volatility but do want to have their capital protected): have a maximum of 10 percent invested in the JSX, and keep the rest in fixed-interest. Certainly the JSX is a very volatile market and should either be avoided by low risk investors or be participated in with only a tiny amount of their available funds, whatever the prospects for the JSX may be.

Any low-risk investors who, unaware of the level of volatility in the market, happen to be invested in the JSX market for percentages larger than 10 percent, should take their money out, pat themselves on the back for their luck and invest in fixed- interest only.

How do I arrive at forecasts for the JSX to reach 1300 and interest rates to drop under 10 percent by the end of 2006?

Firstly, the Indonesian government is doing a sufficiently successful job of keeping inflation in check so that the end of the interest rate rise cycle is close. Also, oil prices will not rise above the US$70 level (a very important factor for Indonesia's level of inflation). In fact, oil prices may come down (currently they are trading at just under $60).

Secondly, the appetite of international investors will still be there in 2006. This is a vital factor for the JSX, as 70 percent of the trading is done by foreign investors. Confidence is slowly building again in the international business community here, as one can hear from a number of the International Chambers of Commerce.

Although it is not primarily businesses investing in Indonesia that fuels the JSX (this growth comes mainly from large institutional investors, such as emerging market funds and pension funds), this investment does matter from a psychological perspective. Institutional investors do pay attention to the general investment climate in Indonesia, considering economic, social and political factors. International investors will also like the inclusion in the cabinet of well-respected people, such as Boediono, and more generally the progress, albeit slow, that the new government led by SBY is making.

Thirdly, at average price-earnings ratios of around 9, Indonesian stocks are not over-valued. Domestic buying of Indonesian stocks may well start to pick up again when interest rates, at some point in 2006, start to come down.

Lastly, the global investment climate in 2006 will be fairly benign. Although the JSX tends to run its own course, a favorable global investment climate in 2006 is a positive factor.

Are there developments which can turn this bullish scenario into a disaster? Yes, there are plenty. One of the main indicators to look for is the price of oil. The Indonesian economy is highly sensitive to the oil price, both on an economic and a social level. Whenever the government is forced to raise the price of fuel, there is social unrest.

Readers, you have my advice about where to put your money. Now we come to the next part of my advice: how to weigh my words, or those of any "expert" making forecasts about the financial markets and advising about short-term investment strategies.

There is no proof that the price evolution of financial markets over a 12-month period can be predicted with any degree of accuracy, absolutely none! In the U.S. investors now look back at more than 100 years of history of trading in stock and bond markets (compared to Indonesia's 28 years) and an enormous amount of research has been done to determine whether short-term movements in stock prices, such as those over one-year periods, can be predicted. The conclusion remains: it is just not possible!

Sometimes, financial writers refer to the stock market as "Mr. Market". Actually this suggests quite an appealing comparison. Thousands and thousands of analysts spend their time trying to predict what Mr. Market's next moves will be. A psychological assessment might say that Mr. Market clearly has his own mind in an almost pathological manner. Brilliant or mentally ill, when it comes to being outguessed, Mr. Market beats them all: analysts, newsletter writers and investment gurus alike.

So, why do we busy ourselves with will happen with the markets in the New Year? The answer may be quite simple: we are people! We like to imagine, dream, guess, challenge against the odds, avoid the anxiety of not knowing and...we like to have fun! For many of us it is boring just to accept that the markets cannot be predicted, much more fun "to have a go at it".

Here are some facts. Having reached a level of 1160, the JSX is trading at an all- time high.

This is a stock chart showing the JSX index from the start of trading in 1982 until mid-December 2005. Although this chart tells us nothing about future movements, it does demonstrate the overall level of volatility and the great run that the market has had over the last 3 1/2 years.

We live in a time when we can be constantly bombarded with the latest financial news, hot tips, analysis, talk show gossip and so forth. There is certainly enough information out there. It is good to take all of this with a grain of salt.

And this leads me to my last tip for the year 2006 for The Jakarta Post reader:

Enjoy the excitement that can come with listening to "financial experts", whether in seminars, on the Net or on TV, and reading articles (including this one), but always take very good note of your own sense of things, what your own "nose" tells you,

and consider that the chances are that things will never be as good, or as bad, as the experts want us to believe.

The writer is CFP and FPC qualified financial planning professional.