Market Outlook After IDX Regulations

In August 24, 2015, the Jakarta Composite Index (JCI) fell to 4,164, which was the lowest position of the index since almost two years ago. And in Thursday, August 27, 2015, the Indonesia Stock Exchange (IDX), the host and regulator of Indonesian capital market, finally held a press conference regarding the current condition of the Indonesian stock market. Here are the points of the conference.

Press Conference of IDX. Source: www.idx.co.id

1. In the last month (August), there were several global issues that reduce the level of investor’s confidence in the capital market in the country, such as speculation over the hike of Fed Rate, the decline in crude oil prices, as well as the slowdown in economic growth that is happening in China.
2. Although global economic conditions are less favorable, but 73% of the companies that listed on the Stock Exchange still posted a positive net profit in the First Half of 2015. Of the group of 20 largest listed companies by market cap, PT Tekom Indonesia (TLKM) even still posted an increase in comprehensive profit by 6.0%.
3. Related to the fall of Jakarta Composite Index (JCI) in Monday, August 24, the IDX and the Financial Services Authority or FSA (Otoritas Jasa Keuangan/OJK) as stock exchange regulators has implemented several policies: 1. Companies may buy their shares back without shareholder’s general meeting, 2. Any stock can only go down for a maximum of 10% in a day, 3. Investor Protection Fund (Dana Perlindungan Investor/DPP) is increased from Rp25 to 100 million (about US$ 2,000 – 8,000), and is executed by PT Penyelenggara Program Perlindungan Investor Efek Indonesia (P3IEI), and 4. Activities related to stock transactions that violate the regulations, such as short-selling, will monitored more closely.
4. IDX considers that the decline in the stock index is still fairly in reasonable limits. Taking into account the healthy performance of the listed companies, the IDX hoped that the investors will remain optimistic.

In an event of Investor Gathering in Jakarta, I said that one of the signs that the decline of JCI may have reached its lowest point, is if the market authorities, in this case the IDX and FSA, or the government itself (through the Ministry of SOEs or other) began to intervene the stock market directly. As we know, JCI has been dropped since the end of last April, yet until mid-August there were no response from IDX. Based on experience, if IDX itself still do nothing, it means that they consider that the JCI was still in a normal position, or in other words JCI could go down further to a position that is no longer normal, where the investors would be panic and irrational (this is called the market cycle, read the explanation here).

However, when the JCI keep declining until it has reached a panic phase, which almost all stocks plunged no matter its fundamentals were good or bad, only then the IDX will intervene. And if IDX/government has intervened, meaning that they themselves consider that the position of JCI already low enough. The Ministry of SOE itself has announced that it would buy back the shares of SOEs.

In this case, it does not mean that the government is certainly right when they said that JCI has reached its bottom. But if it is the government (not me) who said that the JCI is already low, then the general public would listen to them. Yep, so there is a psychological factor here. In October 2008, when the stock index crushed about 60% from 2,800’s to 1,100’s, the Government also announced that it would spend Rp4 trillion (about US$ 300 million) to buy back the shares of SOEs. And the result, in November and December of the same year, the JCI rebounded and eventually closed at 1,300’s at the end of 2008, and continued to rise in the next year.

So we could say that the Gov response, which we've been waiting in the last few months, it finally has occurred. And although we of course cannot predict the future, but to invest when the JCI is at a low level like today is certainly far more ‘lightly’, than if you are forced to pick stocks when the index was still at the level of 5,400’s, while we all already know that the National Economy is slowing down.

However there are some things you should consider.

In early part of this article, I mentioned that there were several global issues such as the hike Fed rate, falling oil prices, and a slowdown in China's economic growth, and that's not including the Greek crisis, or even political crisis of Malaysia. These external issues could have a negative impact on JCI. When Rupiah continue to be impaired lately towards US Dollar, it is also because of the global economic slowdown.

On the other hand, although the IDX said that 73% of listed companies still posted net earnings in the first half of 2015, but it means that the other 27% has suffered losses. In other words, from four listed companies on the Indonesia Stock Exchange, about one of them were losers. And when it is mentioned that from the top twenty largest companies, Telkom Indonesia (TLKM) still posted an increase in net earnings, then it means that the other nineteen companies posted a decline in earnings! This condition is certainly not too good, and it is aligned with the national economic condition that is not so good. If we keep holding on rules of value investing where we can only buy stocks that: 1. Has good fundamentals, and 2. Has low valuation, so although currently most of the stocks are sold at low prices, but it is still relatively difficult to find one with good fundamentals.

So although IDX and the FSA has launched four policy related to the stock market, and maybe there will be other policies, but the problem lies on the fundamental of the stocks itself. In an author's note, some stocks in certain sectors still have a very good performance, but most of the others can not be rewarded with the title of 'pretty good' though. So we would not want to be more selective.

And, when the IDX saying that ‘the financial performance of the listed companies are relatively healthy’, well I have to say that I do not agree. Logically, if the performance of listed companies is still relatively good, then how could the stocks continued to break new low? And even several big cap stocks are already down more than 50% from their highest positions. Such extreme conditions will not happen if the performance of the company is still ‘relatively healthy’. You know, if there's a good stock which its price falling down, then even if the holders keep selling it, but the other investors will rush to buy it, and consequently the decline will not be too deep. However, if the stock is not that good, then when people sell it, no one else will receive the ‘dump’ and as a result it will be plummeted.

One more thing: It looks like the IDX paid no attention to the problem of the impairment of our beloved currency, Rupiah. While these problems can be very serious for companies that have a liabilities (usually in bonds) denominated in USD. Maybe IDX or FSA also need to issue regulations that companies have to hedge their USD debts against the fluctuations of currency exchange rate, so that the impairment of Rupiah, which may continue, will not have a very negative impact towards the company's performance.

In conclusion, although the policies from IDX, FSA, and the Government may indicate that ‘the worst is happened’, but the JCI may require a real positive sentiments in order to go up again, or let say a better performance of the companies in the next third quarter of 2015. On the other hand, stories about Fed rate hikes etc may hold the JCI to not immediately rise in the near future, or even fall again. While the positive sentiment related to government spending on infrastructure, as I convey many times before, the positive impact may only be seen at the beginning of next year.

So well, if you want to buy stocks for long-term investment, you may have to wait a little longer, at least not until the ‘noise’ from China, the US, and others subside by itself, or when the Rupiah eventually found its position and then stay there, aka does not impaired further.

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