Stock indices experienced a solid performance last week. In particular Indonesia's main stock index (IHSG) was up. Although Standards & Poor's downgrade of Indonesia's debt outlook has made many foreign investors decide to sell part of their Indonesian stock portfolios (last week about IDR 960 billion of foreign funds left the IHSG), the index did not fall. On the contrary, it reached a new record high level. So why did the index not fall? There are a number of reasons that explain this situation.
First of all, various stock indices were marked by a bullish trend last week. America's Dow Jones Index also set a new record at 15,118.18 points. Furthermore, the FTSE, DAX, CAC40 and Nikkei were also in a strong upward trend. Various economic data contributed to this development. For example, America's lower unemployment rate as well as higher non-farm payrolls seem to indicate ongoing economic recovery. Moreover, continued stimulus programs support investors' confidence in the stock market.
Secondly, we have to realize that the Indonesia stock exchange is not dominated by foreign funds. Foreign investors account for about 41 percent of total daily transactions in 2013. Therefore, it are in fact domestic investors who dominate the market. In the last two weeks, foreigners sold IDR 2 trillion of Indonesian stocks. Two weeks ago, this led to a fall but due to strong purchases of domestic market participants last week, the index rebounded and reached a new record high level.
Will the IHSG's rise continue this week? Before answering this question, we should take a look at the current condition of the index. With last week's rise, the IHSG's PE ratio is now 18.9x (while the IHSG's average PE ratio is 15-17x). As such, it is currently not far from its all-time record of 21x and thus there is a higher risk of profit taking although upward potential should not be ruled out either. The IHSG's bullish trend of the last two months is not as strong as it was at the beginning of the year. Therefore, we expect the index to move somewhere between the 4,950 and 5,150 points this week.