Investment Strategy, For Now

You may notice that Jakarta Composite Index (JCI) moves nowhere lately, that it does not go up, but tends to decline, but with slooow movements. In April the index was closed at 4,839, and when this article was written, it was at 4,753, or dropped but only 1.7%. If this position lasted until the end of the month, this month of May would be the first month in 2016 where the JCI went down, but with a decline of 1 – 2% only, so we could not say that the market has entered its bear period.

But this situation may raise questions: What should I do? Moreover, despite the slow decline of the market, but some stocks like Perusahaan Gas Negara (PGAS) are already tumbled, while on the other hand some small caps keep rising. For investors who in cash position, you may ask, is it the time to buy? While for investors who in stocks position, you might considering to sell some your stocks because, even though these stocks are slowly declining (if you stocks are following the movement of JCI), but they’re declining, right? So why should I hold it?

To answer these questions, first of all we must return once again to the fundamentals. As we've discussed before, the financial performance of listed companies in the first quarter of 2016 were not so good, so like it or not, the JCI will not rise too much in 2016, and you should forget projections that the JCI will go through 5,000 in the near future. Adding to the fact that most of stocks have risen high enough since the event of panic selling in August - September 2015 so that their valuation is not too low anymore, then the best case for JCI is that it will moving sideways in the coming months, with small fluctuations.

While the worst case? Well, it will go down. But when? Anytime, of course. But if we look at the experience in 2011, 2013 and 2015, the JCI will usually reaches its lowest point of correction in August to September.

This picture will describe what is 'Panic selling'

So if your position is outside the market aka holding the cash, then the easiest strategy is to go to the mountains, the beach, or cave so you have no internet connection, then hibernate there until no later than August to September (I say no later, because the market correction could have happened before these months. On the other hand, if the JCI could still rise slightly before the August – September, in the end it would still go down). Experience has taught that the best time to ‘go down the mountain’ and to buy massively is when people are screaming in panic. Meanwhile, if the market is still in a cool and calm situation like today, then close your laptop, go on vacation, and do whatever you like, just do not look at your portfolio.

However, it is certainly not that easy to hold a huge amont of cash for months, especially if you are a stock market professional who have nothing else to do. In fact, doing so (take a full cash position) would bear a huge risk, ie if the market didn’t go down as projected. And despite the fact that JCI is declining, but some stocks are still going up. So if you can find some cheap stocks whose performance is still good in the first quarter of 2016, then you may still generate a significant profit though the general market wasn’t in your favor.

An example, exactly a year ago ie in May 2015, the market situations were not much different from today where the companies reported bad performance on the First Quarter 2015, so I concluded that the JCI will sooner or later fall (and indeed it fell months later). But still, there were several companies that have a good performance with bright prospects at least for the mid term, one of which is Sri Rejeki Isman (SRIL), which after some analysis, I bought at the price of Rp274 per share. And indeed, a few months later the JCI continued to fall until stopped at 4,200’s, but SRIL rose to Rp400’s per share. So that’s it: We managed to generate profit when most investors were in struggle against the bear market.

So if this year you can find stocks like this SRIL (usually a second liner stock with a small nominal price, which is hundreds of Rupiah), then maybe you can still make profits, once again, although the JCI tends to fall. I have a list of some stocks that might be 'the next SRIL', but let me unveil one of them only: Try to look at Japfa Comfeed (JPFA).

However, the decision to ‘go to the sea when the weather is bad’, of course, is probably a risky bet that you might be able to come home with plenty of fish (read: profit), but your ship might also even sink! When you buy a certain stock with good fundamentals and indeed it goes up, then there is simply no guarantee that it will not be dragged down when the market got hit by panic selling. Throughout the end of 2015 until the first quarter of 2016, we've been through periods in which the market conditions were very friendly, so maybe now we have to rest at home until the storm passed. Assuming that you have already earned a significant profit over several months ago, then as long as you do not suffer any losses in the near future, at the end of the year your investment performance will still be much better than the market average. And the only way to ‘suffer no losses’ is to hold cash.

Okay, so now we have two options of strategy: 1. Stay out of the sea until the people screaming out ‘here goes the tsunamiiii!', or, 2. Buy stocks selectively, by focus on stocks with small nominal price and good fundamentals. Actually, because we certainly will not know where the JCI would go, then you can combine the two strategies above, where you can buy several stocks but do not spend all the cash you have, just in case if the market was falling. Well, the choice is yours.

Disclosure: When this article was written, Avere is in a position of JPFA on average purchase price of Rp980 per share. This position can be changed at any time without prior notice.

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