No Tapering is Bullish? The Federal Reserve Playing with the Global Market
Starting from May 2013, Indonesia's benchmark stock index (IHSG) has been on a weakening (bearish) trend inflicted by various reasons. First, in early May, Standard & Poor's downgraded Indonesia's credit rating due to the government's hesitancy to slash fuel subsidies. Then, the Federal Reserve started to speculate about ending its quantitative easing program. Capital outflows that followed indicated the vulnerable state of the Indonesian economy. Moreover, the controversial hike in fuel prices in late-June resulted in high inflation.
On the one hand, the hike in fuel prices was needed to relieve the the government's budget balance, while averting the current account deficit from widening further (the country's current account deficit reached USD $9.8 billion in the second quarter of 2013). Moreover, the move was needed to regain trust of international credit agencies. Standard & Poor's (S&P) downgraded its outlook on Indonesia’s BB+ rating from positive to stable as the agency assessed that Indonesia's reform momentum is fading and the external profile is weakening. A few days later, Moody's threatened to take a similar measure. On the other hand, it was already known prior to the fuel price hike that it would trigger high inflation and thus impact negatively on people's purchasing power. Thus, large resistance against the fuel price-hike existed among the Indonesian population.
Last week, after months and months of speculation, the Federal Reserve finally announced that it would not alter its monthly USD $85 billion bond-buying program, known as quantitative easing, yet (and most likely it will be continued for the remainder of this year). The following day, Indonesia's IHSG jumped 4.65 percent. But does that mean all risks are gone?
According to my calculations (using Indonesia's macroeconomic conditions instead of market euphoria), the logical value of the IHSG - after the foreign capital outflows - is somewhere around the level of 4,500 points.
Indeed, it is expected that foreign funds re-enter the Indonesian market in the fourth quarter of 2013. After IDR 35 trillion (USD $3.1 billion) was pulled out from the country between May and August, IDR 20 trillion (USD $1.8 billion) may come back in the months ahead. However, investors are also aware of the fragile state of the Indonesian and the global economy. Economic growth is slowing down, interest rates are high (in emerging economies), and the current account deficit is still widening. While in the United States, the threat of a new fiscal crisis is emerging towards the end of the US fiscal year in September. Concerns about the 'tapering' may fade temporarily now, but the US fiscal situation can become a new concern for investors.
This week, I expect the IHSG to rise. A lack of positive market sentiments from the domestic and international side may result in profit taking. However, during the week foreign funds are expected to (re)enter the market and thus lift up the index.