Potential Alternatives

But given the strength of these latest rallies in stocks, there is also the possibility that we will see short-term pullbacks as Indonesian investors take profits after a prolonged period of weakness in the space. One potential alternative here is the gold market, as we have already experienced some significant changes in commodities already this year. Expressed in US dollar terms, the price of gold has already increased by 15 percent year-to-date, and this is the biggest move we have seen in nearly three decades.

This has brought some attention to the space that has not been visible over the last few quarters. In the chart above, we can see that gold markets have now made up for all of the declines posted over the previous year. Moves like these are significant in that they largely indicate that the momentum present in the previous trend has reached its exhaustion point. They also give us some alternative investment options when we are looking to start positioning for long term investments.

Emerging Markets and Safe Havens

So the real question here for Indonesian investors is whether we are likely to see stronger rallies in regional stocks, or in the commodities space. To get a sense of what is most probable, we must understand the financial environments in which each of these sectors perform best. In emerging market stocks, price activity tends to be bullish when the market environment is stable and economic data show improvement. In contrast, gold markets tend to perform best when the financial climate is volatile and in disarray. In these cases, gold is viewed as a safe haven for investors that are looking for protection from potential market shocks.

So, going forward, investors will need to assess the market in these terms in order to determine whether assets like gold will make more sense than Indonesian equities. Improving economic data in the region will make it easier to increase expose in Indonesian stock benchmarks. If this is not the case, assets like gold present an interesting alternative for new investments.

This column was written by Richard Cox, university teacher in international trade and finance, focusing on lessons in macroeconomics and price behavior in equity markets.