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Is It Bullish Again, or What?

Last Friday, February 21, 2014, the Jakarta Composite Index (JCI) closed at 4,646, so in year-to-date basis, the index has gained 8.7% during the year of 2014. Psychologically, some investors may confused at this point: Did the JCI gained too fast, so that later in the end it would fall, or it's just the beginning of another bullish period? What if it later successfully reached the 5,000 level like April last year?

As I had explained in the article entitled The Spirit of ‘Fresh 2014’, the entire stock indices in the world, including JCI, basically will continue to rise in the long term. But sometimes the rise is too early, so a downturn momentum is then required to neutralizethe market. So every time the stock index fell, you may call it as a ‘market correction, aka to restore the JCI itself to a position that is supposed to be. At certain times, the drop was just a little so it does not become a big deal. But at other times, the JCI could decline more deep than usual. Usually the higher the previous rise experienced by JCI, then the lower the correction would be. Most people only pay attention to the market crash in the years of 1998 and 2008, without paid attention to that in previous years, the index has risen very quickly to make everyone had thought that buying stocks is a quick and easy way to become rich.

However, whenever the JCI has risen substantially, it does not necessarily mean that it will be dropped shortly thereafter. In 2009, the stock index rose 87%, the highest in history. But does that mean that in the next year it would fall immediately? The fact, it does not. In 2010 JCI had still rising rapidly, this time 46%, as well as in subsequent years it continued to rise until it stopped in the year 2013 when the JCI is eventually dropped, but it was only minus 1%.

Otherwise, the extreme decline in JCI also does not necessarily mean that it will soon recovered. In 1997, the index fell 44.3%, driven by a weaker Rupiah and other issues. Then how about 1998? It still continued to fall, although at the end of the year it starts to recover to make it was only down 1% at the year. And so on.

The point is, you cannot immediately conclude that JCI will rise immediately just because it has dropped before, or concluded that JCI will soon go down just because it has gained a lot before.

Then how do we know that JCI will continue or stop climbing? Well, I have to say that frankly, there is no way to know it precisely, but there is one approach that we can use: Value approach. In September 2008, the stock of the people of Indonesia, Bumi Resources (BUMI) had dropped from 8,450 to 3,000’s, and at the time all people were screaming that the price is already low! The reason? BUMI’s previous price was Rp8,450 per share, and now (at that September) the price has been less than its half! Is that not low enough for you?

However, there was one person who does not believe the hypothesis of 'this stock has dropped by more than half, so it's already undervalued'. That person is Gita Wirjawan. When people began to buy BUMI at prices of 3,500’s to make it rose briefly to nearly 4,000, Mr. Gita kept wait and see. And a few weeks later, when BUMI eventually dropped below the level of 1,000, Mr. Gita took a large amount of shares, by take over a certain percentage of BUMI shares held by Bakrie & Brothers (Bakrie), where Mr. Gita uses his connections to JP Morgan Bank to refinance some of BNBR’s debt. Less than a year later, BUMI rose back to nearly 3,000, and that was the moment when Mr. Gita reaping the rewards of his patience.

Well, I do not know what was the reasonable price for BUMI at the time, but clearly Mr. Gita has had its own analysis so he could concluded that BUMI is not low enough at the price of 3,000’s, although the price had dropped more than a half. And when it was below 1,000, that’s the right price to buy!

Another example is my own experience. In 2010, Resource Alam Indonesia (KKGI) held a stocksplit, and shortly thereafter the price skyrocketted from 950 to 1,700's. A friend asked me to analyze the stock, and I found out that this small coal company had a very good performance, but the price of 1,700s is still very low, so I decided to buy it although it had already gained nearly doubled. And a few month later this KKGI successfully flew up to 8,000.

The point is, once again, we can not estimate the movement of JCI (or certain stocks) just because it has gone up or down before. What is important is the valuation of the stock index itself, is it reasonable or not. And you can see the valuation on the website Indonesia Stock Exchange/IDX ( On the homepage of the website, click on tab 'publication' on the left, then again click 'statistics'. On the next page, you will see the average number of PER and PBV of all shares in the Stock Exchange. Currently, the PER and PBV of JCI are 16.1 and 2.4 times respectively.

Most of you probably have known the information above. Including information that the position of PER and PBV of IDX when the market was normal are 12 - 15 times, and 2.0 - 2.2 times respectively. That means? The JCI is slightly overvalued at the moment, so it is more likely to fall than rise. Believe or not, the analysis is that simple! Securities analysts usually using fancy numbers in tables and graphs in explaining the position of JCI, and simultaneously predict whether it will go up or down, including trying to explain how the effect of the elections against JCI. But from a standpoint of a value investor, again, the analysis is that simple.

Still, there are other things you should consider. Remember that PER is the ratio of stock prices to corporate profitability, while PBV is a comparison of the stock price with the value of net asset (capital, or equity) of the company. This means that if the companies on the Stock Exchange are having declining performance, where many of them had lower profit or even a loss so that their equity are also dropped (due to the deficit), then the low PER or PBV do not necessarily mean that the prices are already at low positions.  The same thing applied to JCI, where the low PER and PBV do not necessarily mean that the JCI’s position was reasonable (or undervalued).

However, based on experience, there is only one period where all companies in the IDX had simultaneously decreased performance, ie when the monetary crisis hit the nation in 1998 (unlike America, the history of the JCI began in 1982, so we haven’t had much crisis). So you could say that although the average of PER and PBV at the time was very, very low (JCI had dropped to as low as 270's), but its recovery requires a long time, where the index began to gaining again in 2002. Meanwhile, when the global crisis occured in 2008, some companies had declining performance but the average performance of the listed companies on the Stock Exchange at the moment was still normal and is still growing, and, therefore, the market immediately soar again in just one year later.

And fortunately for the year of 2013, outside the sector of commodities that was still down, there were no problems, including the Rupiah also began to recover to a level of 11,000's per US Dollar. You could check the latest company's financial reports, you’ll find out that our companies had doing well last year.

Based on this simple analysis, we can say that the level of 4,200’s for JCI, as happened in August and December 2013, was fairly undervalued, or at least reasonable, because at the time the PER and PBV were 16.9 and 2.2 times respectively, so it was the time for shopping. Okay, in terms of PER, the index was still seem expensive, but I assume that the numbers were probably wrong because it was too high when paired with PBV of 2.2 times, given that the average ROE of the ten largest listed companies on the Stock Exchange is still quite high at 27.1%, and because when JCI at the level of 5,200’s, its PER and PBV were 19’s and 2.7 times respectively (so how could the PER was only down slightly, when the index has dropped almost 1,000 points?). So in this case I took the PBV.

The market statistics on the last trading day of 2013. Click to enlarge

But most importantly, remember that at the time, especially in August, the negative sentiments are still widely spreaded, where those who predicted that the JCI would crash are still hanging around, especially when the index continue its ‘terror’ to 3,800’s. But you do not need to care about pessimistic voices like that. To be honest, the index are actually could dropped further to 3,600, or 3,400, or any levels, but trust me, no matter how deep the decline, it would eventually rise back to its fair value! Why didn’t you learn the case of 2009?

Okaaay, but now the question is, how about the next? Will JCI continue its rally or turned down?

However, if in the short term, there are several other components beyond value that you should consider. One of them, the entry of foreign funds. Okay, in the long term, the flow of foreign funds does not affect the movement of JCI. But in the short term, in this case less than one year, they can push the JCI to go up when they are buying, and dragging the index down when they are selling. For example, just take a look at the year of 2013.

So far, since the beginning of 2014, foreigners had spent the total of Rp9 trillion to the market (net buy Rp9 trillion), and this is contrary to the their position throughout the year of 2013, which recorded net sell of Rp20.6 trillion. Is there something unusual with this? No, it's normal. During the period of 1997 to 2013, the foreigners have only had net sell for two years, namely in 2005 and 2013. I do not know what the cause of their exit in 2005, whether due to tapering or the other, but it is clearly that in the following years they were back to market, helping the index to rose steadily (except in the year 2008, of course). So why now the foreigners return to the market? Well, that is because they need to spend their money after their clearance yesterday, that's it! And since the year of 2014 is still quite long, then in the future they can continue their shopping because when averaged, foreign fund inflow in the IDX is Rp15 - 20 trillion per annum. This means JCI could still go up for the rest of the year. Although the valuation of the index at this time was a bit pricey, but not as expensive as when the JCI at 5,200’s level, which its PBV, as already mentioned above, reached 2.7 times.

But if in some future they (or us) decide to take profit, then well.. the JCI will break a while.

To date, the fair position for the JCI is still in the range of 4400's, has included the consideration of the company’s most recent performance in the fourth quarter of 2013. JCI may be able to rise to above that level (and it happens, right?), or conversely, fell to below the level, but its equilibrium will remain there, at least until the next season of financial statements.

So now, you know what to do. For me, I keep holding my position, where I’m not selling any of my stocks, but also holding my cash. Just remember, although the stock index could rose as high as possible, or otherwise it could down as low as possible, but in the end it will return to its fair position, and the experience of 2013 has proved this. The JCI reasonable position will usually change/increase along with the development of the listed company's performance, but it would take time. Let say, one day it will break the sacred level of 10,000, but if it happens next week, next month, or even next year, then you will know that it's too fast. Simple, is not it?

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