After rose 22.3% in
2014, the Jakarta Composite Index (JCI) seems to having a hard time in this
2015. When this article was written, the stock index fell to 4,887 or down 6.5%
from year to date. Considering about the poor conditions of national economy
(we've discussed about this in this website many times before, try to read our
articles since last March), then this situation is not surprising at all, and has
been anticipated before (or at least we’ve anticipate it, I don’t know about
others). If there is no fundamental change in months to come, then most likely
this condition will continue, and consequently the JCI would grow negatively in
this 2015. The question, what should we do?
JCI actually has begun
its bear period since the end of last April, where it suddenly fell from 5,512
to 5,086, triggered by poor performance on the listed companies in the first
quarter of 2015. Because the decline was too much (more than 8% in just a week),
then shortly afterwards it quickly rebounded to 5,300’s. But well.. because
there are no events that could fundamentally change the outlook for Indonesia's
economy in the future (yesterday, the rating agency, S&P, upgraded the
outlook for Indonesian sovereign rating, but the rating itself remains
unchanged), then it is not surprising that the JCI dropped once again.
In our investor
gathering with the theme 'Tips & Strategy to Deal with the Bear Market'
that was held in Jakarta, June 23, 2015, I presented at least three main points
related to the national economy:
- The growth of national economy has began to slow down, where most of the listed companies posted a decline in profits, inflation is still high at 6.9% year on year, and the exchange rate of Rupiah is still low at the level of above Rp13,000 per US Dollar.
- However, we are still far from the crisis. But if there are no changes related to government policy, etc. in the near future, then it is not impossible that the crisis will eventually come.
- Based on experience, when the economy began to show a trend of slow down, then the trend will not immediately change in the near future, but it could take months or even years to recover (related to the stock market, that’s why we call it bear market, not just a market correction).
Well, I do not know if
I've ever said this before, but I will say it again: In the short term, in this
case less than three months, the price of a stock can go up or down regardless
of its fundamentals (whether it’s good or bad) and valuation (whether it’s high
or low). However, in the medium to long term (three months or more, or over one
year), the stock price will always
follow the fundamentals of the company and its valuation. In less than three
months, the share price of Bank BRI (BBRI) or Bumi Resources
(BUMI) could go up or down, so that in the short term some people may suffer
a loss from BBRI, or make profit from BUMI. But in the long term, in this case
the last few years, BBRI has been able to rise steadily, while BUMI,
oppositely, down steadily, and it is certainly not without reasons: When BBRI
able to posted consistent net profit from quarter to quarter, BUMI continues to
suffer losses that eventually makes its equity to be negative aka capital
deficiency (so in terms of book value, BUMI currently no value at all).
![]() |
Logo of Bank BRI, the company with the finest performance in the IDX for the last five years |
The same way also
applies to JCI: In the short term, the stock index may rise or fall regardless
of the performance of the listed companies, and regardless the valuation. But
in the long term (or minimal medium), JCI will eventually follow the
fundamentals of the national economy. The question, do you think that the
businesses in Indonesia are still going well, or indeed a little bit hard lately?
Okay Sir, so are you
saying that the JCI, overall, will go down in this 2015? Well of course it is
not necessarily. Like I said in this article, the economy will
improve in the future if 1. The Government is willing to loosen some of its
policies related to the economy (mainly related to subsidies and taxes), 2. The
price of commodities, especially palm oil and coal go up, or 3. The
developments of the infrastructure be realized. In its best scenario, the
economy could grow for more than 5% for the year (from currently 4.7% only),
and likewise the JCI will have a fundamental reason to rise back.
But let's take the
worst-case: If the JCI is really go down this year, then what should we do?
Before we talk about
strategy, if you to look at the historical data of JCI, you’ll find this:
Although the JCI will continue to rise in the looooong term, but it could also go
down in particular years. Between 1997 to 2014, the JCI closed down 6 times, ie
in 1997, 1998, 2000, 2001, 2008, and 2013. Between 1997 and 2001, JCI dropped
almost every year because of the long monetary crisis. In 2008, JCI was once
again down due to the effects of the mortgage crisis in the US, and in 2013 JCI
dropped because the national economy began to slowing down after the continuous
expansion for nearly 10 years earlier. We had talked about it in here.
While in other years,
JCI rose steadily. Thus, over the last 18 years (from 1996 to 2014), JCI rose
in twelve particular years, and fell in the other six. So in average, by not
including dividends, the JCI went down
every three years. But the switching between the increase and decrease of
the stock index was in random pattern.
I mean, the JCI could rose steadily for five consecutive years and fell in the
sixth year, or conversely, JCI could down for two years in a row, and rise
again in the third year.
And believe it or not,
if we take the example of the movement of S&P
500 index in the United States as displayed in the Annual Letter of Berkshire
Hathaway, the pattern is almost the same. Over the last 50 years, ie between 1964
to 2014, the S&P was fell in ten particular years, and rose in the other
forty, also with a random pattern. Longest streak for the S&P occurred
between 1990 - 1999, where it rose steadily for 9 years in a row, only to be 'paid
off' by a long decrease over the following 3 years.
So it can be concluded
that the S&P, in average, was down every five years. However, the data are
including dividends. If we take out the dividends, the S&P actually fell
more than 10 times, probably 15 times in the last 50 years because in certain
years the increases (with dividends included) were only 1 – 3%. Thus, without
the dividends, the S&P 500 also went down every three years, just like JCI.
The point is, I wanna
say that if the JCI will actually go down in 2015, then there is nothing wrong
about that, because you cannot expect the stock index to rise continuously each
year, can you? About the current unfriendly economic situation, although sucks,
but it's only a part of a cycle. I mean, when the economy grew fast from the
beginning of 2000’s until reaching its peak in 2011, you acted like nothing
special, did you? So why do you have to complain when the economy is now
slowing down?
Okay, but it does not
answer the question: As an investor, what should I do in the present
conditions?
In an event of investor
gathering in Jakarta two weeks ago, I told the participants about three
strategies: 1. Quick trading for exploiting the rebound of the JCI, 2. Keep
buying shares with good fundamentals (at low valuations, of course), and 3. Just
hold your cash and wait, until the stock prices are really discounted. For our
own fund, we have sold most of our positions in the third week of April, or
shortly before the stock index fell at the end of April, so that we are currently
in a free position to apply one of three above strategies, or a combination of
all three.
Okay, now let's discuss
them one by one, starting from the quick trading. The key is, when JCI is in a
downtrend over a period of time, let say for several months, it will not go
down continuously but interspersed by rebounds,
just like in last May where JCI rose from 5,086 to 5,300’s. Here, we can take
advantage of the rebound by buying bluechip stocks with good fundamentals. So
you can hold your cash, and wait for another ‘incoming fire’ like what was
happened at the end of April. And when the JCI fall for about 7 – 9% in just
one week, that’s your buying signal!
And incidentally, when
this article was written, the JCI is in another fire, so maybe you could
immediately apply this ‘hit and run’ strategy. For those of you who are still holding
some stocks, you also can take advantage of the rebound momentum to get out (don’t
sell your stock when the index is already fall like today!)
Yet this strategy has
drawbacks: We certainly can not predict when the JCI will rebound. If the
timing was missed, you may have to sell your stock in losses if the index
continued to decrease while you've already take some positions. Some stocks may
also not necessarily rise when JCI actually rebounded. Therefore, you may choose
the next strategy, which is keep buying shares with good fundamentals at low
valuations.
Because, like I said
before, when the performance of the listed companies on the Stock Exchange is
fairly bad, there are always companies whose performance is still okay, with
low valuation of shares. When the JCI falling down, the stocks with bad
fundamentals would go down first, followed by stocks with good fundamentals but
with high valuations.
While for stocks with
good fundamentals and low valuations, in the short term they probably be
dragged down, but also probably able to
keep going up, or at least stay in their positions. And even if they are
dragged down, but in the end they will rise again quickly when the bear period
ends (the JCI may drop to any level, but in the end it will rise again). The example
of this ‘I don’t give a f*ck about the stock index’ strategy is Metrodata
Electronics (MTDL). Between May and September 2013, dragged down by the
decline of JCI which fell from 5,200’s to 4,000’s, MTDL also falling from 330's
to lower than Rp200 per share. But when the JCI correction ends, MTDL rose back
quickly because there was no problem with the company’s fundamentals.
For this strategy, you
almost do not need to pay attention to the movement of JCI at all (you could focus
on the stock only). However, the problem is, in a condition where the majority
of listed companies posted poor financial performance like today, it is not
easy to find a stock like MTDL. Okay, some companies had a good performance in
the first quarter 2015. But if the recent slowdown in economic growth
continues, then who can guarantee that they will still posted a good
performance in the next second quarter?
Because of that, you
can also select the third strategy: Just hold your cash and wait, of course,
while continuing to pay attention to economic developments of Indonesia.
Because, based on
experience, when the JCI declining for an obvious cause (this time the cause is
related to the poor development of the domestic economy), then the stock market
will not be immediately recovered in the near future. In 2013, JCI took three
months to get down from 5,200 to 3,900, and stays at that low position for the
next four months. In 2008, the stock index also took nine months to get down
from 2,800's to 1,300's, before it eventually recovered.
As for this decline,
calculated since the end of last April, the correction has been running for one
and a half months only. I do not know how low the JCI could fall (actually we
have our own estimates, but not to be openly published). But if we look at the
current economic development of the country, and also the poor performance of
companies, then JCI was supposed to continue to fall in the coming months, once
again, if there is no particular event that could significantly change the
economic outlooks to be more optimistic.
The third strategy is
the most secure, but also the most boring and need some psychological strength,
even we can not do it. And it also has its drawbacks: What if it turns out that we are just too pessimistic about the market?
What if there is no such bear market? At the end, nobody could predict
about the movement of stock index, right?
So we prefer to combine
it with the fist and second strategies, for example, by keep holding Sri Rejeki
Isman (SRIL) (the second strategy) which, when this article was written,
was able to stay in his position despite the declining of JCI.
Of course, when the
market is not so friendly, it is very difficult for anyone to make a profit, no
matter what the strategy adopted. However, if you loss 5% this year while on
the other hand JCI fell 10%, then you actually posted an investment performance
that is better than the average performance of the entire players in the Stock
Exchange, and the value of your portfolio still have the chance to re-grow
significantly in the next year. Just remember, we do not invest in stocks for
just this once, but forever. And if this year's JCI does not produce a
satisfactory performance, then statistically it is actually good because it
will be easier for the stock index to climb up in the following year. At the
end, we've done this before, so why worry?
Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.
Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.
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