Last August, precisely August 24, 2015 when the Jakarta
Composite Index (JCI) dropped 4% in a single day and closed at 4,164, and triggered a moment of panic
selling, I wrote an article entitled Between Euphoria and Despair. In the article I presented several phase of the period
of bear market, namely denial, bull trap, return to ‘normal’, fear,
capitulation, and finally, despair. And by referring to the fact that JCI had
tumbled significantly from its peak, ie 5,500’s until reached 4,100’s, and also
has passed through several phases ranging from denial to fear (or
capitulation), then at the end of the article, I ask, are we in the phase of despair yet?
Because, considering that the phase of despair is
a bottom or lowest point of the period of bear market, then if JCI has reached
this phase, it will subsequently, slowly but surely, rise again.
And after a few months, the JCI went up and now it
is in 4,500’s. So maybe the question is still the same: When the stock index was
in 4,100’s last August, is it its bottom? And if the answer is yes, then what’s
next? Well, to answer that question, then you can see again the picture below,
which shows the phases in the period bear market, and also bull market (click image
to enlarge). Btw, the picture is not mine so you can check the original source
at the bottom of the picture.
Now, take a look at the far right of the picture
above: One of the characteristics that the market/JCI has met its despair phase,
is if the stock index itself rose significantly until it return to the mean or
average position, after falling steadily before. Yup, so if we want to know
when the JCI has reached its despair simply by looking at the charts, aka using
the technical analysis only, then you will only know after the despair
occurred, ie, after the JCI rose back. I mean, if today the JCI is still in a
position lower than the 4,164 of last August, then you can not say that 'We are
now in the phase of despair!'.
For example, on September 28, 2015 ago, or a month
after the panic selling of August, the JCI dropped once again and closed at
4,120, or lower than 4,164 in August. So until the end of September, we still
could not say that the market has reached its lowest point, we don’t know it
yet.
However, after that September the JCI did not
reach a further low, and today it is already in 4,500’s aka has risen high
enough, but still below its mean (if
we use line of MA200, aka moving average of one year as the mean). So, in a
technical standing point, JCI may
have reached its phase despair in last September, and today it is in a phase of
consolidation. We call it
consolidation because the decrease has been slowed down (JCI could still go
down at any time, but without drop of more than 2% in a day), the selling
pressure eased, but on the other hand the JCI has not significantly going up.
Consolidation phase is not part of bear or bull
market period, and therefore can lead into two possibilities: JCI tumbled once
again to a position of new low, which means that we have not yet reached the
phase of despair, or contrary, JCI continue to rise until it go through its
mean, which means that, in technical standpoint, the bear market period is over
(by the way we use moving average of one year as mean, because we assume that
if the bear market period is over, we may buy stock and then hold it for at
least one year ahead). When this article was written, the mean line of JCI is
at 4,785.
Fundamental Analysis of JCI
But if we only start buying stocks after the JCI
go up through 4,785, doesn’t it mean that we’re too late? Well, at this point,
we must go back to fundamental analysis, in this case the domestic
macro-economic analysis. And here are some simple facts: First, after the Rupiah
exchange rate stable at Rp13,500 – 14,000 per USD, nobody talks about the crisis, because on the other side the
economic conditions in the country also began to improve. If you remember, in last
September everyone said that the impairment of Rupiah could possibly lead to a
monetary crisis like in 1998, but in this
article I said that there will be no crisis. And indeed, there was no
crisis, and the rate of economic
growth in the third quarter was 4.73%, or improved compared to the previous
quarter which is only 4.67%.
Second, in the last two years, in order to reduce
inflation as a consequence from the rising price of fuel, etc. (as the
Government revoke the subsidy), Bank Indonesia (BI) continues to raise the BI Rate
to current position of 7.50%, and most investors do not like it, where they
expect that the BI Rate remains in a low level, which could help to to boost the
economic growth. The good news, the latest data show that inflation for the
month of December 2015 was only 3.5% year on year, and this may allow the
central bank to lower the BI Rate sooner or later. And when the Rate go down,
it will be responded positively by the market.
And third, as well as, most importantly, the
performance of listed banks in the third quarter of 2015, in general have been
better than the previous quarter (second quarter), and this is a signal of
economic recovery. And if the economy starts to recover, the composite index
will automatically follow.
So taking into account the above factors, the
phase of consolidation that is currently happening in JCI is likely to lead to..
a beginning of a bull market, of
course. Look again at the picture above: Long before the JCI enter a period of
bull market (marked by a phase of media attention), and even when the JCI itself
is still below its mean, some ‘smart money’ decided to buy stocks before the
others, of course at a lower purchase price. This type of investors, though
they arguably take the risk because they buying stocks when the index is still
in a consolidation phase (which means that the it could turn down again), but
they were bold enough because they can see that, taking into account the
company's fundamentals, sectoral conditions, as well as the national
macroeconomic, all of which showed improvement, so there is no way the JCI will
record a new low. In this condition, investors who understand the fundamentals
will generate much larger profit, than those who rely on technical analysis and
only waiting for JCI to break out first.
(And, by the way, the same condition also applies
when the market will go down. In March 2015, when the JCI is still at the level
of 5,400's and continued to rise, I have said in
this article that there is a problem with our economy, and that JCI willl
eventually going down in line the detoriated fundamentals of the national economy.
But because, in technical standing point, the JCI still shows a pattern of an
uptrend, almost no one is thinking of selling except a small number of
investors who aware about the economic conditions. When the JCI eventually dropped
at the end of April, only then the crowd all poured out of the market, but it
is too late).
Back to 2016. So uh, okay, are you saying that the
JCI will go up? But what about the stock market crash in China? Yuan devaluation?
Well, that’s an old story mate! There is no crisis in China, and we've been discussed
it over here,
and here.
The point is, as long as the ‘commotions’ in China or America do not have a
negative impact on domestic economic fundamentals, and there is no negative
effects whatsoever, the composite index would be just fine. I mean, if the
current economic conditions are like in 1998 or 2008, I will not be as
optimistic as today (crisis of 1998 was preceded by Thailand, and the crisis of
2008 preceded by the United States. While in 2011, the Greece was in a crisis,
but it had no any impact to Indonesia). But yeah, just try to look around you: What
crisis? Hellooo crisis, where are you???
And if the JCI will actually rise sooner or later,
then like I said in here,
the stock picks will be from the sectors of banking, infrastructure, and
property, because only these sectors which have good sentiment for 2016 related
to the continuation of the development of infrastructure etc., plus their financial
performance is quite good. If you notice, some of the stocks in the above
sectors have started moving up in recent weeks, but considering their
fundamentals and the still low valuation, then they could rise further.
Nevertheless, nobody could predict the market
precisely. So if later there is fundamental changes in the economy and the market,
I will update the analysis, just stay tune.
Any inquiries about investment in Indonesia Stock Market, please send an email to teguh@averepartners.com
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