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Between Trump, Indonesia’s Political Situation, and The Fall of JCI

In Friday, November 11, the Jakarta Composite Index (JCI) dropped 4.01% in a single trading day, which, of course, sparks some panic. But because the index was still in a relatively high position, ie 5,200’s, then the panic didn’t became a widespread. Because if you already bought some good stocks at the beginning of 2016, then you must be still in a profit position, although the profit is probably not as big as before.

However, because the 4% drop was coincided with a series of important events from both inside the country and overseas, there is speculation that associates the fall of JCI with the election of Donald Trump as President of the United States, or with the ‘drama’ over the non-active Governor of Jakarta, Ahok, that is not yet fully clear. Thus, the stock market was thrown into confusion.

So in this condition, in order to renew our investment strategy (to match with the current situation of the market), an investor is required to sort out the information, to distinguish valid information which based on facts and data, from information that is merely an opinion or rumor, that actually has no effect to the movement of JCI nor any certain stocks. The good news, since the position of JCI is still quite high, it is still not too late if we have to sell some of our stocks. So what are the facts and figures that need our attention? Well then, here we go!

First, and this is the easiest point to be seen, the JCI at 5,232 has gained 13.9% since the beginning of the year 2016 (year to date/YTD), and it was very high compared to the increase in stock indexes in major countries such as the United States (6.8%), the UK (8.8%), China (minus 9.7%), and Japan (minus 8.7%). When compared with some neighboring countries, the rise in JCI also relatively high compared to Malaysia (minus 3.4%), Singapore (minus 2.4%), Australia (1.9%), and only behind Thailand (16.4%). Taking into account the fact that equity markets around the world is still sluggish in 2016, that many stock indexes were not rising but instead dropped (the Singaporean Straits Times have even been negative for two years in a row), the increase in JCI is somewhat too fast. Because on the other hand, the financial performance of the major listed companies on the Indonesia Stock Exchange (IDX) in this year is still not fully recovered from 2015, where their net income were still dropped. I mean, if Astra International (ASII) et al posted an increase in net income in this year, the 13.9% hike for the JCI is supported by strong fundamentals and could continue, just like in 2009 in which the stock index skyrocketted 87.0% after the market crash of 2008, because in 2009 the companies once again (or still) posted a very good financial performance.

But unfortunately for today it is not the case, so like it or not, sooner or later the JCI will be back to its ‘right track’.

Second, throughout the first half of 2016, precisely until the beginning of June 2016, the market was still moving moderately in accordance with the development of the domestic economic fundamentals, which the JCI, although rallied from its initial position of 4,593 at the beginning of the year, but the rally stopped at the level of 4,800's.

But still in the month of June, there was a key event that led to an increasing optimism of the market: The government's policy entitled Tax Amnesty (TA), which were expected to: 1. Increase the state tax revenue to fund the development of infrastructure, 2. Withdraw the funds belonged to Indonesian business person that had been put outside the country to return to the homeland (repatriate), and some of which will go into the capital market, and 3. The process of incorporation and the investment will be simplified to accommodate the repatriation of funds, and it will eventually boost economic growth itsel. You can read again the full story in here.

And unlike to the other Government policies, this TA was very popular and discussed by many people ranging from rich entrepreneurs, grocery store owners, civil servants, private sector employees, and also the stock traders and investors. The booming of TA then attracted foreign investors to buying stocks in large quantities. In mid August 2016, the foreign net buy in the IDX was already Rp38 trillion, or in other words the foreigners were buying stocks worth Rp34 trillion (about US$ 3 billion) in just two months (as in mid-June, before the booming, the foreign net buy was only Rp 4 trillion). And consequently the JCI jumped from 4,800 to 5,450's.

However, just like the other sentiments that became popular at one time but later forgotten, this story of TA is no different. In late August, when the JCI was already high and investors became apprehensive of what’s next, the TA sentiment had faded, and the market was in a state of 'quiet' that there was no positive nor negative sentiment, thus the JCI was stalled. At this point we can conclude that if later the market is crowded once again either by positive or negative sentiments, the composite index could easily fall, if sentiment turns out to be negative. Actually, at the beginning of September, when the sentiment of TA was already dimmed, the JCI had a quick drop to 5,146. But later came out the news that the state revenue from the tax amnesty, which was going nowhere at the beginning of its implementation, was successfully reaching Rp92 trillion (from the target of Rp160 trillion), just before the deadline of Tax Amnesty Phase I on September 30. As a result JCI went up once again, but the gain was halted at the resistant of 5,450.

So when the JCI is now drop, in fact it is just repeating the decline that occurred in early September. Just like in early September, today nobody’s talking about tax amnesty.

Third, about the ‘Trump Effect’, in these days everyone has their own opinion and analysis about the influence of the election of Trump as the US President to the global economy, including Indonesia, where some people think that the influence would be good, some other think that it would be bad, and the rest have no idea at all. Then about the case of Ahok, after the big demonstration on November 4, there is also a rumor that there will be a another demonstration on November 25, and the uncertainty of the political situation in the country related to this issue will probably continue until the Election of Jakarta itself was held in February 2017.

Now, if the stock market was already covered by ‘uncertainty’, where almost all people are confused about what would happen if Trump do this, what if Ahok do that, then what will happen to the JCI? Dropped further, of course, and it's not because of our economy has fallen or the like, but because investors will step aside until everything becomes clear. Plus, it's the end of the year, where most people (including me) is busy thinking about going on vacation for the new year, rather than talking about stocks everyday. I mean, come on man! We need to rest our eyes and fingers!

The Bright Side

Until the third point above, all indicate that JCI is likely to fall further, and that a 4% drop yesterday might be just the beginning. However, wait until you read the points of the fourth, fifth, and sixth. Okay, here we go again.

Fourth, after the booming of tax amnesty, the stock market actually got another boom, namely the increase in commodity prices, especially coal, where since last October, the coal stocks rose rapidly and began to attract the attention of investors, and some of them have also begun to make huge profits. If this momentum continues, the market optimism will remain intact, and that will prevent the stock index to dropped further (because JCI will only dropped heavily if everyone is in a state panic and despair, remember that).

Fifth, we know that since 2015 until today, the Government as the largest ‘conglomerate group’ in the IDX has many corporate action ranging from the IPO of SOEs, IPO for SOEs subsidiaries, right issues, and the securitization of assets of state-owned enterprises, in order to finance infrastructure development. So now, to help these corporate actions to be successful, then what is the requirements? A stable market condition, of course! For example, if at one time the government wants to hold an IPO of an SOE, but at the same time the JCI dropped to 4,500, for example, would the investors have appetite for the IPO? You know the answer. Thus, the government has an interest to keep the JCI at ‘confident levels’, or at least would not fall to a despair level, and actually it’s easy job for them. I mean, how do you think that the stocks like PPRO, SMBR, INAF, until TLKM could rise until several hundred percents in a matter of months?

So, believe me, if later the JCI drop to a level which the Government considers that it is already too deep, they will immediately take action, whether it be through the IDX, the Financial Service Authority (FSA), or others, thus the market will quickly recover. Still remember when panic selling hit the market in August 2015? At the time the Minister of SOE, Rini Soemarno, directly gave instruction to Bank BRI et al to buy back their shares, and shortly thereafter the stock index rose sharply in November of the same year.

And finally, sixth, after almost fell into the crisis in 2015, in this 2016, the macroeconomic fundamentals Indonesia is slowly but surely starting to recover, thanks to the incessant development of infrastructure by the government, not including lots of economic policy package to stimulate the private sector (so fear there are 14 packages), and the development of e-commerce industry. In 2015 the economic growth was only 4.67%, Rupiah plummeted to as low as Rp14,700 per USD, inflation was high at 8% (then because of rising fuel prices, after the fuel subsidy is revoked), unemployment 6.2%, and the balance of exports and imports also had deficit (although turned to surplus at the end of the year).

While today? Well, the latest figure of economic growth was 5.02%, the Rupiah is stable at Rp13,000’s, inflation is very good at the level of 3.3%, unemployment 5.6%, and the trade balance kept surplus since the beginning of the year.

And you know what? All of those positive developments are achieved when the prices of commodities, especially coal and crude palm oil (CPO), which are the backbones of the Indonesian economy in the last two decades, were still not fully recovered! Actually, when the economy in the country began to slowing down after the year 2011, the main and only cause was the drop in prices of coal and CPO, which were (and still are) our main export commodities. And since we know that the commodity prices begin to rise back, then what do you think about Indonesia's macroeconomic outlook for the year 2017?

Palm oil fruit and coal, the main commodities of Indonesia


In conclusion, JCI will probably dropped further, that’s normal, but the decline will not be too deep, and I including those who believe that the JCI will close the year of 2016 in a  position that is higher than the position of last year, ie 4,593. After all, there are dozens of stocks that has gained more than a hundred percent in this year, which need a ‘little adjustment’.

Okay, then what is the strategy? What should I do now? Well, it's obvious, is not it? If your position is still full in stocks, you can sell some of them to gain some cash, at least 30% of the total value of your portfolio, then wait for some time. At the end of Desember, when all the commotion about Trump, Ahok, etc is eased and replaced by the optimism of the new year, then that’s when you can go full power. Remember that, just like the hoopla about the Tax Amnesty woul eventually fade over time, then all the confusion about the 'Trump Effect' will also be forgotten, and the market will recover by itself when people realize that they can buy BBRI et al in a price that is.. what d’ya say? Reasonable.

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