You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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Domestic Investors vs International Fund Managers

If you open IDX website today (www.idx.co.id), you will find the news that at the end of 2016, domestic investors owned about 45.5% of all outstanding stocks in the market, while the other 54.5% were belonged to foreigners/international stockholders. Although the Indonesian Stock Exchange was still dominated by foreign investors, but the ownership of 45.5% of domestic investors was the highest in the last ten years or longer. Previously, between 2007 and 2015, the local investors owned about only 33 – 41% of all outstanding stocks in the market.

But since 2016, domestic investors began to shift the dominance of foreigners in the Indonesia stock exchange, first in term of trading value and now in term of stock ownerships, and this trend continues until today. But before we talk about domestic investors, first we talk about international investors who put (part of) their investments in Indonesia.

And here we go. Until today, Indonesia is still have not fully recognized as ‘a good country for investment’ or as they call it, a country with investment grade. Until the beginning of 2017, from three of the world’s largest rating agencies, Fitch Ratings, Moody's and S&P, only Fitch and Moody's which rated Indonesia as an investment grade country. Even in Southeast Asia, in terms of this investment grade status, Indonesia is still below Singapore, Malaysia, Thailand, and even the Philippines.

The lack of good investment ratings causes the global fund managers to put Indonesia as one of their latest destinations to place their investments, because to invest in Indonesia Stock Exchange (IDX) is considered very risky/closer to speculation. So if you manage US$ 1 billion to be placed in equities around the world, for example, then you will probably only put a total of US$ 1 million in here, to buy only mainstream stocks like Astra International (ASII), or Bank BRI (BBRI) (note: ASII’ market cap is only about US$ 35 billion, but it is already one of the biggest market caps in IDX).

So, besides the foreign companies that invest in Indonesia by acquiring local companies, the international asset management companies usually unwilling to buy stocks on the IDX, and consequently the value of foreign buy/sell in the stock exchange was never too big. The largest net buy of foreigners occurred in 2014, which is worth Rp42.6 trillion or about US$ 3.1 billion, and that is the total value of purchases made by all foreign investors in IDX.

While according to data from Investment & Pensions Europe, by the end of 2016, the world's 400 largest asset management firms has AUM of a total US$ 56.3 trillion! But only a very-very-small portion of the funds that have reached the Indonesia Stock Exchange. Actually, from the 400 asset management firms above, most of them might never buy stocks in here (or they don’t even realize that IDX exists).

But interestingly, the ‘small’ value of trading transactions by the foreigners were still strong enough to affect the fluctuations of Jakarta Composite Index (JCI), especially in the short term, that if they are buying then JCI would usually rise, while if they are selling then JCI would usually fall. In June – August 2016, at the peak of tax amnesty sentiment, the foreigners bought stocks in large quantities so that the net foreign buy position in the market soared from only Rp4 trillion (US$ 350 million) in May, to Rp38 trillion (US$ 2.9 billion) in August, and the JCI jumped from 4,700 to 5,470. But after August, the foreigners began to sell, and as a result the JCI losing its power to rise higher. Actually, based on historical data that is shown in this article, the actions of buying or selling by international investors do not affect the ups and downs of JCI in the long term/yearly, because in the long run, the movement of JCI is mostly affected by macroeconomic fundamentals and performance of the listed companies. But in shorter terms, in this case monthly or weekly, the inflow and outflow of international funds possess significant influence on JCI fluctuations, although, once again, the value of international funds in the stock exchange is actually very small.

Increasing Number of Domestic Investors

When international fund managers started to sell their stocks since August 2016, then normally the JCI would fall. But until today, the JCI is still stable at 5,250s, aka did not back to 4,800s as in early 2016 (ie when the international fund has not entered the market). The question is, how could it be?

And maybe the answer is, when the international investors continued to sell in the last few months, but at the same time the local investors continue to buy. There are at least two facts which supported this opinion. First, during 2016, the aggregate value of stock trading by local investors was Rp1,164 trillion (US$ 87 billion) or 63% of total trading value on the Stock Exchange, and it increased significantly compared to the previous years of Rp800 trillion (US$ 60 billion), or only 57 – 59% of total trading value of both local and international investors. Second, as mentioned above: The increased portion of local investors’ ownerships of outstanding stocks in IDX, from 33 – 41%, to a record of 45.5%. Since we know that Philip Morris et al has not sold their holdings in HM Sampoerna (HMSP) and others, the increase in domestic investors’ ownerships is not due to foreign outflow, but because of the increasing number of new local investors who began to buying stocks.

In 2016, for the first time, domestic investors dominated almost two thirds of the total value of trading transactions on the Stock Exchange.

So what caused the stock exchange to be flooded by local investors? Well, that's pretty obvious, is not it? In the last 1 – 2 years, the IDX as regulator as well as organizer of the Stock Exchange has done many activities which aim to educate and encourage the public to invest in stocks, ranging from setting up branch offices up to Papua (the most eastern province in Indonesia), organizing capital market seminars on schools, universities, and corporate offices (I also had been invited as a speaker), launched the campaign of ‘Yuk Nabung Saham!’ (literally ‘let's saving on stocks!’), and began to put advertisement on television and newspapers. In short, we could say that the people in IDX are working hard to increase the number of local investors in the market, and consequently the number of retail local investors locally increased from about 300,000 in 2013, to 550,000 by the end of 2016, and counting until today.

But when domestic funds flooded the stock market, the number of international funds in here is stagnant. Between 2012 and 2016, international investors recorded a net buy of Rp31.5 trillion (US$ 2.4 billion) in total, and this figure is quite small compared to the previous five years (2007 - 2011), which totaled Rp109.6 trillion (US$ 8.2 billion). But if we look at the data of macroeconomic of Indonesia since 2007, the less spending by international investors in the last five years could be explained: Between 2007 – 2011, Indonesia were in the peak of economic growth thanks to commodity booming (which interrupted by the global crisis of 2008, but the fundamental of domestic economy at the time remained stable). But starting from 2012 until today, along with the decline in commodity prices, our country never again saw economic growth of more than 5.5% per year like before, so of course the international investors lost their appetite to invest in here.

However, if you look at the current fundamentals of national economy, then, as we already discussed it in here, it is quite clear that the current economic condition, though not as good as in 2007 – 2011, but slowly recovering from its lowest point in 2015, and there is a prospect that the growth of national GDP will score a high rate of annual growth in the next few years. This means, regardless of short-term issues such as local politics etc. that cause international investors to sell, but in the long run they will be back.

But even if they are not coming back, we can still rely on the local funds to maintain ‘peace’ on the market. You see, although the number of domestic investors in the stock exchange has increased significantly since 2015, but the number is still less than 1% of the total population of Indonesia, aka very small, thus it could still be increased further in the future, provided that IDX continues to aggressively campaigning for the stock investment itself. On the other hand, although the S&P still has not given the rating of investment grade for Indonesia, but I thinks it’s just a matter of time, because the economic development including the development of infrastructure in the country still running smoothly until today, not to mention that the prices of coal and CPO, which is the backbone of the national economy, began to rise.

And when the S&P finally gives the investment grade rating, then there you go: Indonesia will officially be a country that is worth for investment. And from that point, Indonesia will no longer be underestimated by the big international fund managers, and they will start to buy stocks in here. This combination of local and international investors will eventually make the Indonesia Stock Exchange to be much bigger than before, at least become the largest in Southeast Asia (bigger than Singaporean Stock Exchange), and it will happen sooner or later.

(Note: The S&P actually raised Indonesia’s rating to investment grade in May 2017, or only four months after this article was written).

So as I often said, ‘The stock market in Indonesia is just like the stock market in the US but at 50 or even 100 years ago, and we are like Warren Buffett in the 1960s. Thus, I can say that we are lucky, because we are the early generations of the stock market in Indonesia, but the luck will be useless if we do not start to invest from now! So, are you join us or not??

Original article was written and published (in Indonesian Language) in January 25, 2017. Any inquiries, contact the author (Teguh Hidayat) by email teguh.idx@gmail.com

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