The Influence of S&P's Outlook Downgrade on the Indonesia Stock Index (IHSG)
The Jakarta composite index (IHSG), Indonesia's main stock index, was mixed last week. During the week it lost 53 points or 1.04 percent to finish at the level of 4,925.48. A number of blue chips, such as Bank Mandiri and Astra International, were hit by large sell-offs as the downgrade of S&P's debt outlook for Indonesia's BB+ rating kicked in and triggered serious negative market sentiments. Last week, I already discussed the 'Bloody May' phenomenon, the month that usually results in a correction.
In the first week of May, the index fell as much as one percent. Does this mean that 'Bloody May' has begun? And to what level can the index decline? Its strong support level seems to be 4,800, and prior to that, the level of 4,850 may be a minor support level.
Last Friday (03/05/13), the Dow Jones Index showed a great performance. In fact, it even reached the level of 15,000 points as released US labor force data made many investors enthusiastic. Last month's non-farm payrolls rose to 165,000 and the US unemployment rate fell to 7.5 percent, the lowest rate in four years time. Jobs in America are much more available now compared to February and March. This development makes people assume that there will not emerge another slowdown in the economy.
Will those positive sentiments in America fly over to Indonesia and trigger an upward movement of Indonesia's IHSG? Before answering this question we should take a closer look at S&P's downgrade first. As the credit rating agency lowered Indonesia's debt outlook from BB+ positive to stable it has reduced chances for Indonesia to get the investment grade from S&P soon. Moreover, the downgrade implies an increase in perceived risks of investing in Indonesia. With the increase of perceived risks, the amount of foreign investment in Indonesia will be reduced or be set back according to the level of risk. This can result in short-term capital outflow as well as a sell-off in Indonesian stocks. If it is not offset by purchases, the index is destined to fall. Last Friday, foreigners sold up to IDR 800 billion (USD $82.5 million) in stocks. Moreover, improvements in the American economy will make investors eager to allocate funds back into America. Therefore the potential for short-term capital outflows from Indonesia increases as was seen last Friday when Bank Mandiri and Astra International had to cope with large-scale sell-offs.
How safe are investments in Indonesia now? I see no strong reason why investments in Indonesia have lost its attractiveness. The reason why S&P downgraded Indonesia's debt outlook is because the Indonesian government took too much time to respond to the fuel subsidy issue. However, such a downgrade has been experienced by most countries, including the USA and the united Kingdom. In my opinion it should be explained as a reprimand of S&P in order to spur the Indonesian government to speed up reform of its subsidy policy. It should be remembered that - fundamentally - Indonesia is still growing strong.
Currently, the price to earnings ratio (PE ratio) of the IHSG is rather high at 18 times based on earnings in Q1-2013. Therefore, the correction that we saw last week might continue this month. If this week's support level of 4,800 is broken then the IHSG may be labeled bearish for the short term. As such, investors are advised to reduce their stock portfolios and maintain their cash positions. The threat of capital outflows is currently high and therefore it should be anticipated with the correct measures. As investors we cannot fight the market, we can only anticipate on the market's trend.
David Sutyanto is a research analyst at First Asia Capital
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