Where to put your money in 2006
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.