Indonesia's benchmark Jakarta Composite Index continues its run in record high territory on Monday (06/11). While Asian stocks are mixed, overall, this morning, the Jakarta Composite Index is carefully climbing in green territory. It is interesting to note that, recently, the benchmark index is not only being pushed higher by the large-cap blue chip stocks, but also by mid-cap and small-cap stocks.
Although the big cap stocks remain the biggest contributors to the total value of stocks that are traded on the Indonesia Stock Exchange, the significance of the mid and small cap stocks has risen as the role of domestic investors has grown in recent months.
So far this year, there has been a net capital outflow from the Indonesia Stock Exchange, while the Jakarta Composite Index has been rising, hence it implies a significant amount of domestic investment in stocks that are traded on the Indonesia Stock Exchange.
Reza Priyambada, analyst at Binaartha Parama Sekuritas, said one of the consequences of an increasing amount of domestic investors in the market is that it makes the performance of the Jakarta Composite Index more volatile; the reason being that Indonesian investors are short-term minded in nature. This also (partly) explains why the Jakarta Composite Index fails to exceed significantly above the 6,000 points level (as profit taking becomes attractive especially considering looming monetary tightening in the USA). Particularly Indonesia's banking and consumer stocks are regarded "expensive" at the moment.
At the end of trading last week, the market capitalization of the Jakarta Composite Index reached IDR 6,885 trillion (approx. USD $510 billion). Combined, the market cap of the ten biggest listed companies equals IDR 3,240 trillion, or nearly 50 percent of total market capitalization on the Indonesia Stock Exchange where 564 companies are listed. The top 50 companies account for almost 75 percent of total market cap. Thus, there exists a high degree of inequality in terms of size.
Such inequality makes the performance of the Jakarta Composite Index less efficient as the biggest companies basically determine the direction of the overall benchmark. And while 29 companies have successfully conducted their initial public offerings (IPOs) in Indonesia so far this year, their sizes are relatively insignificant and therefore IPOs fail to make market capitalization more equal.