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Why Should Afraid of the Foreign?

Last week, precisely on Tuesday, 12 November 2013, Bank Indonesia (BI) once again raise the BI rate to be 7.50%, and that decision causes negative response from the market. On that Tuesday, which was followed by the next day, the Jakarta Composite Index (JCI) dropped up to the level of 4,200, where the greatest pressure faced by banking and property’s sectors, which was expected to be affected directly by the increase of the rate. When this article was written, JCI started to rise into position of 4,366, yet still has not reach its previous position before the fall.

However, the most interesting point to observe is the outflow of foreign funds in incredible amount, ie Rp4 trillion or equal to US$ 400 million only in this November alone. Actually, due to the outflow, I think JCI should be down below its current position. However, it still capable to hold on into levels of 4,300’s. And if you reflect on the fact that during 2013, the foreign funds has sell off amounted to Rp15.4 trillion, which it was the first time since 2005 the foreign recorded negative net buy, even up to that size, then JCI should be in a position far below its current; if it’s true that the foreign investor ‘dominate’ our stock market.

This fact, then, makes me wonder; is it true that the foreign dominate Indonesian stock market? Is it true that the ups and downs of JCI are determined by the foreign’ decision to buy or sell the stock, while the local investors have no power at all?

Or perhaps it’s all just a myth?

That is why I re-open the statistic data of trading in IDX in the past, especially in the foreign net buy part within one year, and the increase and decrease of JCI data within that year. Here’s the recap:

Year
Net Foreign Buy
Composite Growth (%)
1997
0.4
(44.3)
1998
5.1
(0.9)
1999
12.1
70.1
2000
0.8
(38.5)
2001
4.5
(5.8)
2002
7.9
8.4
2003
9.9
62.8
2004
18.8
44.6
2005
(15.4)
16.2
2006
17.3
55.3
2007
32.6
52.1
2008
18.7
(50.6)
2009
13.3
87.0
2010
21.0
46.1
2011
24.3
3.2
2012
15.9
12.9
2013*)
(15.4)
1.8

Note:
  1. The net foreign buy is in trillion of Rupiah. If the number is red, then it is negative aka net sell. While for the increase/decrease of JCI (composite growth) is in percent.
  2. The data started from year 1997 because the data for the years before that is not available (maybe it is available if we do search, but I think the above data is enough).
  3. The data for 2013 is up to the close of the market on 18 November.

Ok, let’s start from the year of 1997. As you have known, at that time, JCI was faced by its greatest correction in the history due to the monetary crisis (JCI exists since 1982), and it closed by the fall of 44.3% compared to its previous position in the early year. In this situation, the investors at that time thought that the foreign was out of the market in droves. But the fact in 1997, the foreign still recorded net buy amounted to Rp400 billion (Rp0.4 trillion). Don't get it wrong, although for today Rp400 billion looks like a small amount today, but at that time, it was an enormous amount of fund.

In 1998, the market was still covered by negative sentiment due to the crisis, and kept fell down. However, on the last four months of the year, JCI was capable to rise, so overall it only slightly fell of 0.9%. On this year, the foreign were more aggressively enter the market for a total of Rp5.1 trillion. On 1999, JCI significantly rebound and closed the year with an increase by 70.1%, while the foreign’ net buy recorded at Rp12.1 trillion.

Next, in 2000 and 2001, the foreign still did the shopping, although the value fell compared to the year of 1999, which is only Rp0.8 trillion in 2000, and Rp4.5 trillion in 2001. However, in those years, IHSG once again fell down respectively 38.5% in 2000, and 5.8% in 2001.

So if we used data of the year 1997-2001, it can be concluded that when the foreign raise its buying , then the index will increase. Meanwhile, when the foreign lessen its buying (they still buy the shares, only the amount is not as much as before), then the index will decrease significantly.

The point is, over that five-year period, the foreign did not get out at all, instead if it was accumulated, they had bought shares worth a total of Rp22.9 trillion. Yet during those periods, JCI dropped from the position 721 in the beginning of 1997, to 392 by the end of 2001, or as a whole has dropped 45.6% over five years. If reflect on the ‘myth’ that the foreign’ net buy should cause the index to increase, then the decline of JCI when the foreign did the net buy cannot be explained.

Let’s move on. On 2002, 2003, and 2004, the foreign was still continue to buy, and this time, the JCI was really increased, and break the psychological level ie 1,000 by the end of 2004. However, in 2005, the foreign decided to go out so that at that year, they recorded the net sell amounted to Rp15.4 trillion. What about JCI? Was it fell as well? The fact is, not at all! On 2005, JCI continues to move up, and closed at the position of 1,163 by the end of the year, or strengthened by 16.2%.

So once again, if the previous period of 1997 - 2001, the enter of the foreign funds did not able to help JCI to at least not fall, then in 2005 when the foreign went out, the JCI keep move forward and undeterred.

On 2006 and 2007, JCI rose significantly above 50% for each year. Indeed, on that period, the foreign was once again buying stocks excessively. But on the year of 2008, the condition turned, where the JCI fell down by more than half, and that removed the increase that occurred two years earlier.

So, did the foreign came out in droves on 2008? Not at all! At that time, the foreign still experienced net buy in quite big amount, which was Rp18.7 trillion. So, who did actually came out of the market in droves on 2008? It was the local investors! Possibly the composite index on 2008 could fell down up to that level because there were lots of force-sell incidents faced by the local investors who bought the shares using margin, so they were forced to sell their shares whet they’re experienced loss, and that made the index fell even further. If you’re still remember, the years of 2007 - 2008 was the glorious years for Bakrie Group where Bumi Resources (BUMI) was on the position of 8,000 and at that time, there were many investors bought it using margin.

But unlike the case of 1998, the market crash in 2008 was short-lived (about nine months), and in 2009, JCI soared and recorded an increase of 87.0%, which become the greatest increase in history. What about the foreign’ net buy position at that time? In fact, they fell if compared to 2008, which was only Rp13.3 trillion.

And so on, and so on. If you again analyze the above table to the period in 2013, then you will find the fact that the net buy or net foreign sell have no correlation/relationship with the increase or decrease in JCI. If the foreign sells, then it does not mean the market will fall, and if the foreign spends, then it also does not mean the market will rise. In the very short term, indeed they briefly appear to affect the market. But in the long run, it is clear that the local investors was actually the one, who are more dominant on the index movement.

If we use the data of stock trading transaction value based on the investor type, which is foreign versus local, then since 1997 until today, the local investors was almost always more dominant compared to the foreign investors. Here’s the data, number in percentage. Before that, note that for 2013, the data is until the closing of the market on 18 November.

Year
Foreign (%)
Local (%)
1997
52
48
1998
42
58
1999
35
65
2000
20
80
2001
11
89
2002
8
92
2003
28
72
2004
41
59
2005
41
59
2006
30
70
2007
22
78
2008
27
73
2009
25
75
2010
31
69
2011
31
69
2012
43
57
2013*)
42
58

Ok, see that unless for 1997, every year, the stock trading transaction value by the local investors is always greater compared to the foreign investors, including in 2013. When averaged, for over 17 years, then if trading transaction value is Rp3 trillion in one day, only less than Rp1 trillion of that number was done by the foreign. While the rest of it, which is Rp2 trillion, was performed by the local investors.

So, here’s the conclusion of our discussion today:
  1. The foreign’ movement has no effect on the index movement. On the short term, they may be influential, but in the long run, the local investors are way more dominant.
  2. The only influence caused by the foreign was the overreaction by the local investors in response to their movement. It can be seen from 1997 - 2001, where during that period, the foreign continues to buy the stocks, yet ‘withhold’ in 2000 by recorded net buy amounted to Rp0.8 trillion only. But at that time, JCI fell down up to almost 40%.
  3. The increase or decrease of JCI (including increases and decreases in stocks) did not always due to fundamental factors, but in the end the fundamental factors remained significant. In 2008 JCI should not descend as deep as it was, because at that time, the national economy was still relatively fine (unlike in 1998). But because of the cases of force-sell, and probably the other causes as well, then JCI continue to fell until the position of 1,111. But in the following year, 2009, the shares quickly rose back into its fair position, and consequently, the year 2009 became the year with the highest increase of the JCI in the history, as 'compensation' over 'excessive decline' that occurred a year earlier.
Let’s return into the foreign’ matters. If we look closely, both IDX or Financial Services Authority (FSA) were like letting the foreign in and out of stock exchange, and this condition is different from the other investment instrument such as property, government securities, bonds, to bank deposits, where the foreign investors’ activity in those instruments are limited by various regulations. However, this may not be due to the both authorities have no work to do, but rather intentional because the average of trading transaction value in IDX for the whole stocks is Rp5 trillion or equal to US$ 500 million per day, and that is a small value. And how much the trading transaction value in the New York stock exchange? I don’t know. But let’s take an example from Exxon Mobil’s stock; the trading value is US$1.5 billion per day, or it is three times greater than the whole trading transaction in IDX! And it was just one stock only, not all shares that included in the component of New York stock exchange.

That is why, the existence of foreign investors in IDX is needed to maintain the market liquidity. It was mentioned above that from the daily trading transaction value of Rp3 trillion, as much as Rp1 trillion was done by the foreign. If the foreign is banned from the stock trading, then the daily transaction value will be significantly reduced to only Rp2 trillion, and that’s obviously a small amount. So if we looking from this side, then yes, the foreign activity might affect the movement of the market in short term. But in the longer run, the local investors are still more dominant.

In my opinion, if later the number of local investor/trader in the IDX had large enough (now only less than 1% of the nation’ population), then maybe then the movement of foreign traders can be restricted. Nevertheless, before that, just remember that we actually do not need to be afraid of the foreign at all. If they want to come out, then please; if they want to go in, then go ahead. I don’t care.

Original article was written on November 19th, 2013.

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