NEWS

In the past two months, euphoria has hit the Indonesian capital and financial markets. This is reflected in the surge in the Composite Stock Price Index (CSPI). As of Thursday (8/24), the JCI had broken through the 5403.99 level. This achievement has exceeded the consensus of a number of analysts who projected the JCI throughout 2016 at the level of 4800-5000.

Seeing the current conditions, a number of analysts and Investment Managers (MI) began to turn around by raising the JCI target. In fact, some of them projected JCI at the level of 6000 until the end of the year.

This euphoria has made the JCI to be one of the indexes in the global markets with the best performance. The value of the stock market capitalization has risen and exceeds the market capitalization value of Malaysia and Thailand. Not only that, the daily average transaction value and volume also increased compared to earlier this year.

Foreign investors do not seem to run out of energy to take action to buy. From January to August 19, the net buy value of foreign investors reached Rp 39.9 trillion. Better than the same period last year which recorded a net sell of Rp 2.2 trillion.

The same condition also occurs in the Government Securities (SUN) market. The 10-year tenor SUN yield touched the level of 7.08 percent (24/8). This level shrank from the position at the end of June 2016 at the level of 7.6 percent, thus pushing the SUN return to surge.

From August 2015-August 2016 (yoy), total SUN returns reached 21.5 percent. Exceeds corporate bond return at the level of 15.6%. With foreign funds coming into SUN this year reaching Rp 117.9 trillion. Better than the same period last year of Rp. 64 trillion.

The flow of funds into the stock and SUN market also contributed to the strengthening of the rupiah exchange rate. Rupiah moves stable at the level of Rp. 13100-13200 per US dollar or appreciates around 4-5 percent from the beginning of the year. This achievement was better than last year, where the rupiah weakened by around 10 percent.

Some factors

If examined further, the euphoria of the capital and financial markets is influenced by several factors. First is the policy of the US central bank (The Fed), which until now has not changed its monetary policy stance. The Federal Funds Rate (FFR) is still held at the level of 0% -0.25%. This delay in raising the FFR will more or less reduce uncertainty.

Both monetary easing and monetary stimulus policies are still being implemented by the European Central Bank (ECB) and the Japanese Central Bank (BOJ). This policy will keep global liquidity intact.

The carry trade phenomenon (borrowing cheap funds and investing in instruments that provide high returns) occurs here. Emerging regions, (Indonesia in it) are the target of these cheap funds. This cannot be released given that this region is still able to provide positive returns, even though the economic trend is slowing down. In developed countries, yields tend to be negative.

Not only that, cheap liquidity is still likely to increase. This is inseparable from the policy of the Japanese government which recently launched a fiscal stimulus worth $ 273 billion to lift its domestic economy from the brink of recession.

The third condition of the domestic economy is still relatively good. Even though economic growth is slowing, it is still far better compared to the region.

In fact, in the second quarter of 2016, the realization of economic growth could reach 5.18 percent (yoy). Above market expectations. This trend is expected to continue until the end of the year, along with improved purchasing power, investor confidence, and government spending absorption.

Not only that, this positive economic growth is also supported by maintaining macroeconomic stability. This is reflected in low inflation, a stable exchange rate, an improving current account deficit (DTB), interest rates that are heading for a downward trend, increased foreign exchange reserves, and maintained financial sector stability.

In addition to these three factors, euphoria is also influenced by non-macroeconomic factors. In fact, it can be said that these non-economic factors are strong enough to drive this euphoria. This is because the surge in the capital and financial markets occurred after this factor was released.

As for these factors, First the enactment of Law No. 11 of 2016 concerning tax amnesty. This policy will encourage additional supply of liquidity flows to the capital and financial markets through repatriated funds. The value is estimated to reach Rp. 560-1,000 trillion. Flooding of liquidity supply will drive up asset prices.

Second cabinet reshuffle. This cabinet reshuffle is expected to make positive improvements to the Indonesian economy. Moreover, with the presence of Sri Mulyani Indrawati (SMI) to command the fiscal sector.

The credibility of SMI is no doubt and has a good track record. One of them, in navigating the Indonesian economy, so that it can survive the turbulence caused by the 2008 subprime mortgage crisis.

Managing euphoria

Even so, this market euphoria must be maintained, so that it does not become a backlash for the economy. It must be admitted that the depth of Indonesia's financial market is still relatively shallow.

In fact, until now, the global economy has not shown significant improvements and still carries risks that can quickly change the situation, especially when the Fed is 'tinkering' with its benchmark interest rates.

The results of a recent Ifo Institute survey of a number of economists concluded that the level of confidence in the situation and economic prospects fell to the lowest level in the last three years (Kontan, 11/8) ..

For this reason, the government must be able to produce credible and transparent policies to minimize asymmetric information with market participants.

The "breakthrough" of the finance minister who recently cut 2016 APBN-P spending for the second time by Rp 133.8 trillion is expected to improve the stability of the state budget, which has been under the spotlight of many parties. It is hoped that this policy can improve the perception of the business community and market participants in the direction of the government's economic policy going forward.

Not only that, the government must accelerate various unfinished homework, such as implementing economic packages, accelerating infrastructure development to create connectivity and breaking bottlenecks, accelerating deregulation that impedes investment climate and competitiveness, and discipline in maintaining APBN performance.

Coordination between the government, OJK, BI, and LPS must also continue to be improved in order to minimize loopholes that can trigger macroeconomic distability.

Although currently the BI and OJK are trying to relax various policies in an effort to encourage growth. However, all of these policies must continue to prioritize prudent policies.

It is hoped that all these steps will not make the euphoria that currently engages the financial markets not apparent. Conversely, something that is sustainable, because the government and all authorities can maintain trust with good, credible, and transparent policies. Thus, financial and capital markets can make a positive contribution to the economy.

On the other hand, investors must also remain disciplined in investment objectives by investing in financial assets with good fundamentals. Market euphoria is very sensitive in influencing investor psychology and emotions. It should be noted that the biggest enemy of investors when investing in financial markets is themselves.

Written by: Desmon Silitonga-Analyst of PT Capital Asset Management