After finishing last week with three consecutive days of gains, Indonesia's main stock index (IHSG) reached up to 4,633.11. However, its movement is still rather volatile. Property, finance and consumption stocks were sold by investors after seeing the benchmark interest rate raised by Bank Indonesia (by 50 bps to 6.50 percent) on Thursday (11/07), while metal stocks formed the main supporter of the index at the end of the week. Trading volume in the regular market hit 5.2 trillion and foreigners recorded net purchases of IDR 288 billion.
Considering the whole week, the IHSG was slightly up (0.35 percent), particularly supported by positive global market sentiments after concerns about a quick ending to the Federal Reserve's quantitative easing program waned.
Both the Dow Jones Index and S&P 500 consolidated on Friday (12/07) after gaining 1.1 percent and 3.5 percent respectively. The performance of these indices were supported by good Q2-2013 company reports, particularly in the banking sector.
I detect a more aggressive policy approach by Indonesia's central bank (BI) under new governor Agus Martowardojo. BI is now more aggressive in addressing the changes that occur in the market. This was demonstrated by the measure to raise the BI rate twice in the last two months (from 5.75 to 6.50 percent). A higher BI rate is set to reduce capital outflows from Indonesia. BI hopes that with the higher interest rate foreigners are less enthusiastic to sell Indonesian assets and have more confidence in the IDR rupiah (a move to support the recently weakening rupiah).
One of the most important matters that needs to be followed is the development of Indonesia's inflation figure in July and August. If inflation will exceed 2.3 percent in July then the BI rate might be raised to a level that threatens Indonesia's economic growth due to the high cost of capital. But I see that the government is now more active in using monetary and fiscal instruments to control the economy.
This week, I expect the IHSG to consolidate as investors are waiting for various company reports regarding financial performances of Q2-2013 and amid concerns about the impact of the BI rate hike (which impacts on certain sectors that are vulnerable to the BI rate movement, such as the banking and property sector).