Indonesian stock markets have garnered a good deal of attention to start the year, with the Jakarta Composite Index (JKSE) showing gains of more than 3.2 percent for the period. This is something of an anomaly when we look at the global stock market as a whole, given the fact that most investors have already started to brace for a generalized tightening cycle in interest rates in several key economies.
But while these returns are encouraging, it is important for investors to avoid becoming overly optimistic, as this could create scenarios where investors are buying in at elevated levels. This is the type of trading activity that could quickly lead to losses, as there is an increased probability that we will see profit-taking in stock markets as investors look to capture some of their recent gains after a period of prolonged weakness.
This longer-term chart in the JKSE shows that the dominant trend in Indonesian stocks continues to show bearish activity, with yearly declines still coming in at over 60%. Recent moves higher have been propelled by inflows generated after quarterly GDP figures showed Indonesian growth of more than 5% during the final reporting periods of 2015. This bodes well for the Indonesian economy as a whole, but investors looking to buy and sell at specific levels will need to use some level of caution before buying in during the latest rallies.
Latest Rally Signals Bottom
The fact that these moves have been based on the underlying fundamentals does suggest that we would be seeing a longer term bottom in Indonesian stocks. But conservative investors should wait for this optimism to conclude itself before buying shares as knee-jerk reactions from here will likely create opportunities to start gaining exposure at somewhat lower levels.
It should also be noted that we might start to see better opportunities in specific stocks. One key example here is Astra International, which has been one of the star performers in the JKSE and is now trading at levels that have not been seen since the middle of last year. For those looking at alternative strategies (rather than simply buying into the main stock index) should consider these types of companies as they are less likely to fall victim to short term changes in market sentiment.
In short, these latest moves in Indonesian stocks have created some significant positives in the ways investors are likely to view benchmarks like the JKSE for the remainder of 2016. But investors do need to exercise some level of caution in order to avoid the potential for weakness that could come as a result of profit-taking declines over the next few months.
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.