NEWS

Until now, there has not been any sign of a rebound in the stock and bond markets, after a great deal of pressure over the past year. Global economic data that has been released recently is also not too encouraging.

These conditions make market participants nervous. If the situation is not resolved immediately, it will trigger pessimism. To restore a sluggish economic cycle, pessimism must be avoided.

The uncertainty of market participants is reflected in the poor performance of global stock exchanges throughout January 2016. Historically, the performance of the stock market in January has usually been positive due to the January Effect. Yields on stock exchanges in various global regions were negative, such as the Dow Jones (US) (-6.46%), FTSE (London) (-3%), N225 (Japan) (-7.9%) , SSEC (China) (-23.4%), HIS (Hong Kong) (-10%), and KS11 (South Korea) (-2.5%).

There is also, the yield on the composite stock price index (CSPI) is still positive 0.48%. Even so, this yield dropped when compared to January 2015 by 1.2%. Likewise, the daily average transaction value is only Rp 5 trillion, down from January 2015 of Rp 6.5 trillion. Foreign investors again recorded a net sell of Rp 2.3 trillion. This is down from January 2015 which recorded a net buy of Rp 2.1 trillion.

Meanwhile, conditions are somewhat different in the Government Securities market (SUN). The 10-year tenor SUN yield, which had risen to 8.9%, dropped to 8.2%. Foreign investors are aggressive in making purchases. This decrease in yield was influenced by three factors.

First, the affirmation of Sovereign Credit Rating Indonesia given by Moody's Investor Services (28/1) and Japan Credit Rating Agency, Ltd (JCR) (1/2) at investment worth level with a positive outlook. Second, the impact of the benchmark interest rate cut or BI rate on (14/1) of 25 bps. Third, the rupiah exchange rate is relatively stable, where during January, the rupiah only depreciated by 38 bps.

As a result, throughout January 2016, foreign investor inflow reached Rp 19.1 trillion, bringing the total outstanding foreign investors in SUN up to January 2016 to Rp 578.32 trillion (38% of the SUN market capitalization.

The largest foreign ownership in SUN when compared to SUN of other countries in ASEAN. This is what makes Indonesia's chances of experiencing a sudden reversal become very large when uncertainty increases.

Look at the Three Risks

Although the JCI and SUN performance in January was still relatively good, there is no guarantee that this trend will continue until the end of 2016. A number of analysts were still not convergent in setting the IHSG and SUN targets. This cannot be separated from uncertain external conditions.

At least, three external risks that have occurred in 2015 are expected to still work in 2016. This will determine the direction of the stock market and SUN.

First, the outlook for the Chinese economy will continue the slowing trend. The realization of China's economic growth throughout 2015 amounted to 6.9%. The International Monetary Fund (IMF) projects China's growth in 2016-2017 at 6.5% and 6%.

The performance of China's manufacturing sector continues to contract. This is reflected in the Caixin China Flash Manufacturing PMI Index at the level of 48.4. The sluggish manufacturing sector will cut demand for raw materials and energy, which will increasingly hit countries that have become China's export markets, such as Indonesia.

Not only that, layoffs continue, thereby reducing purchasing power. The flow of investment into China is also expected to decrease, the impact of rising land prices and labor costs. China is not competitive. However, what market players from China worry more about is not its economic fundamentals, but the yuan's devaluation policy. So far, the People Bank of China (PBoC) has twice devalued the yuan (August 2015 and January 2016). This devaluation has caused panic and produced contagion effects to other regions.

Selling pressure in large numbers (sell-off) on the Chinese stock exchange continues. It is estimated that throughout 2015, capital outflows from the stock market will reach $ 1 trillion. This drained foreign exchange reserves from $ 3.69 trillion (June 2015) to $ 3.3 trillion (December 2015). Although foreign exchange reserves have been drained, but the pressure on the stock market has not subsided. Shanghai Index (SSEC) is still in a downward trend, wherein in January 2016 it fell by almost 24%.

Of course, the potential for outflows can still occur, if the devaluation policy continues. In essence, this risk from China greatly influences the psychology of market participants. Second, an increase in interest rates by the Fed. Market participants have more easily adapted to the risks of the Fed. Moreover, at this time the European Central Bank (ECB) and the Japanese Central Bank (BOJ) will continue their quantitative easing (easy money) policy, due to slowing economic conditions. As a result, the risk from the Fed is more manageable.

Even so, the Fed's interest rate hike still has a psychological influence on market participants. This can be seen from the continuing upward trend in the US dollar. This will impact on depressed currencies, especially in emerging regions, because they are considered more risky.

Third, the fall in world oil prices. Oil prices will be an indicator of future economic prospects. The fall in oil prices, on the one hand, can encourage industrial expansion and encourage purchasing power. However, on the other hand, it will also cut the performance of oil and gas-based companies that have many multiplier effects on the economy and will also increase the risk of a State whose APBN is supported by oil and gas revenues.

The Economy is Still Promising

Looking at the three risks, then how should we respond, so that risk can be converted into opportunities for profit. As the Chinese saying goes "in every risk, there is also a chance".

First, investment must be seen in the long-term horizon. Historical data shows, the portfolio market has been hit by the crisis many times but is still able to rebound and record very high yields. Of course, only those who invest when the cycle goes down will benefit, when the cycle turns around.

Moreover, at this time Indonesia's economic prospects are still promising and supported by fundamentals that are getting better, along with structural reforms that are being and will continue to be carried out by the government. This is also supported by monetary stability and a fairly solid financial system.

Second, discipline to diversify. Diversification will minimize risk exposure. At present, relatively many stocks and bonds have discounted prices (undervalued) and are supported by promising prospects, especially the sectors intersected with growth engines, namely consumers, finance, infrastructure, and manufacturing.

Third, continue to practice controlling psychological factors, namely fear (fear) and greedy (greedy). This psychological factor is more fundamental in determining investment success than technical ability and strategy. not many market participants manage to overcome this psychological problem. Get greedy when the majority is scared, and get scared when the majority are greedy (Warren Buffet).

 Written by: Desmon Silitonga Analyst at PT Capital Asset Management

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