2015: The Year of 'Orientation'

Last Monday, July 27, 2015, is the first day for school students to return to their class after a long Eid holiday. And for students who entering a higher level of education (from primary school to the junior high school, from junior school to the high school, and so on), they would experience the ‘orientation phase’ or, in Indonesian term, ‘masa orientasi siswa’ or MOS. Although MOS, in some cases, is more like an bullying activity where the new guy is bullied by senior students, but based on my own experience back then when I was attending the school/college, the tradition of MOS is helpful. Most noticeably is the togetherness among junior students, where we quickly knowing each other because we once 'struggling together' to work on various tasks. Before the MOS, we did not know each other at all.

In short, although the ‘near bully experience’ was tiring, but after it was all over, you will find it helpful. Back then, I could see that some students who never participated in the MOS were eventually isolated among other students.

Okay. In my previous article entitled How to Deal with the Bear Market, I said that considering the poor economic conditions of the country at the beginning of the year (first quarter), the Jakarta Composite Index (JCI) would probably go down in this year. However, no one can predict the market direction. If there was an improvement of economic conditions in the future, the market will respond it positively, and JCI will also rise.

But here’s the situation we have today: 1. The impairment of Rupiah continues, approaching Rp13,500 per US$, 2. Financial performance of financial service companies, including banking, was worse than the previous quarter, mainly due to the increase in non performing loan, 3. The turnover of companies continues to decrease, 4. The word 'layoff' become common, and 5. The condition of the global economy isn’t better, where Greece was hit by the crisis, and the Shanghai Stock Exchange, China, started to fall heavily.

Graphics of Rupiah exchange rate against USD. Source: Bank Indonesia

The bottom line is, admittedly or not, the conditions are now worse than a few months ago. And if it continues then maybe the JCI will actually go down this year. The Index itself at the end of last July closed at 4,802, or 8.1% lower since the beginning of the year.

The question is, will our economy recover? If yes, then when?

The cause of current economic conditions, beyond external factors such as the falling price of commodities and others, is because the Government removed the subsidies of fuel, electricity, and so on, and it does not include the increase in tariff or imposition of new taxes. In summary, the Government withdraw funds massively from the people, and this is what causes people's purchasing power to be down, because the money is no longer there (it is now in the hand of the Government).

But the money will eventually back to people, in the form of infrastructure development. I think it is relatively easy for everyone, including those who are in an opposition against the Government, to be able to see that the Government is very intense in building this and that, starting from the Port of Kuala Tanjung in Medan, North Sumatra, to the food estate in Merauke, Papua. Most recently, last Sunday the President inaugurated the commencement of the construction of an oil and gas refinery worth US$5.8 billion in Donggi Senoro, Central Sulawesi.

Well, when the Government build ports, roads, power plants, and so on, then the Government will disburse a sum of money to the appointed constructor. By the constructor, the funds will be paid to sub-contractors. The sub-contractor will then buy the goods from the supplier and pay salaries to its workers. The workers will use their salaries to buy daily necessities, say rice, and the owner of rice shop will buy rice from farmers, and so on until the money is circulated back into the community.

However, the flow of funds from the Government until it eventually spread back to the whole community, it would take time. A simple logic: ​​When the Government appoints a constructor to build an oil refinery, the process of the tender could be weeks, rights? Similarly, when a constructor appoints a sub-contractor, and the sub-contractors appoint their supplier, and so on, it all will take time.

But the thing is, the process of infrastructure development has been really started and is not just a mere plan. Thus, it is just a matter of time before the funds tha the Gov withdrawn from the community, will eventually return to the community, and this time plus a bonus: A wide variety of brand-new infrastructure, which would encourage the economy to grow even faster than before.

So maybe the year of 2015 is a ‘year of orientation’ of investors. Yep, we're in an ‘orientation’ here! The JCI may fall this year, and you as investors may suffer losses (whether it has been realized or still on paper), and it is certainly annoying, just like when your son or daughter was given a weird task by their seniors in the school.

But in the end, when all the funds return back to the people, when the economy start to growing back (and this time faster), then that’s when the companies will post an even better financial performance, and the JCI will rally once again. This year is not a very good year for the capital market investors because of the poor conditions of economy, but hopefully this is only a short backward to jump higher in the future. If you look at the fact that the Gov is very fast in starting the development of this and that, then I think we will receive the benefit at the beginning of next year, when the funds began to spread back to the community.

And that’s when the JCI will begin to rise again. We'll see!

Any inquiries about investment in Indonesia Stock Market, please send an email to teguh@averepartners.com.