Bloody May; the Month that Brings Traditional Pressures on Indonesia's IHSG
Last week Indonesia's main stock index (IHSG) was mixed with a weakening trend. The index lost 19.9 points, equivalent to 0.40 percent of its value. During the last month, the index consolidated within the range of 4,800 and 5,030 points. Foreign funds continued to pour in and trade volume remained high although below average trade in the last three weeks. In fact, our technical indicators are showing signs that Indonesia's main stock index has become saturated.
In Indonesia, the phrase 'Bloody May' is often coined. The term refers to the situation that the index usually shows a correction in the month of May. And will it happen again this year? There is no definite answer but seeing the consolidating trend that the index has experienced throughout April, it is most likely that the IHSG will be under pressure in May.
Fundamentally, the IHSG has a price to earnings ratio (P/E ratio) of between 18.2 to 18.6. This is a historically high figure, but still below the record of 21. I assume that this is the reason behind the failure of the IHSG to continue its upward trend in April. Rising fuel prices also have a psychological effect on the movement of the index. If the price of subsidized fuel is increased, inflation may rise by 1.6 percent (based on the project of Indonesia's Bank Indonesia). With the threat of rising inflation, the benchmark interest rate of Bank Indonesia might be raised so that the subsequent resulting domino effect will slow down the country's emerging economy. However, the rise of inflation is predicted to last for three months only. Moreover, with lower subsidy spending obligations, the government is able to increase the acceleration of the nation's economy by investing in the infrastructure sector. Personally, I support the government's move to raise fuel prices because currently more than half of the government's total amount of subsidies is allocated to fuel. See the table below.
Allocation of Government Subsidies in 2009-2013 (in Trillion IDR rupiah)
Source: Ministry of Finance
But not always will negative sentiments result in a correction in May. There are still many companies that announce dividend payouts and which can uplift the index, and the performance results of several companies that are focused on Indonesia's domestic market show significant growth. As such, Indonesia's construction and consumer sectors were still in an upward trend in April.
During the month of May it is assumed that negative sentiments will become influential. Throughout history the month of May has usually shown a correction in the stock index. The 'consolidating' trend of the index in April may still continue into next month. As a smart investor we should certainly anticipate the possible risks in May. Maintain your cash position and engage in profit taking regarding companies that have released weak Q1-2013 results can be a good strategy. For next week, the IHSG might be corrected (with the index's support level at 4900). The strategy of 'buy weakness' can be executed in relation to a number of companies that post positive performances in Q1.