Political stability, reforms to bring improvements to stock market

Riska Rahman

The Jakarta Post


Market players are hoping that 2020 will be a much better year for the domestic capital market, particularly the stock market, as Indonesia’s political landscape is expected to stabilize and companies seek to enjoy higher earnings growth.

The year 2019 was relatively tough for the Indonesian stock market as investors’ appetite was largely turned off by uncertainties around legislative and presidential elections held in April. A prolonged trade spat between the world’s economic giants, the United States and China, further worsened the situation as trade volume dropped, leading to a global economic slowdown.

But after Indonesia’s political situation began to stabilize and the US and China struck a “phase one” trade deal late last year, market players are more hopeful entering 2020.

Analysts are upbeat that the Indonesia Stock Exchange’s (IDX) main gauge, the Jakarta Composite Index (JCI), will be able to jump around 10 percent this year.

The stock index closed its final 2019 trading day on Monday at 6,299.54 points, down 0.47 percent from Friday. Throughout last year, the index gained a modest 1.7 percent — not nearly enough to make up for the 2.54 percent contraction recorded in 2018.

Meanwhile, the country’s gross domestic product (GDP) grew by only 5.02 percent year-on-year (yoy) in the third quarter of 2019, the slowest pace in more than two years, as investment fell and household spending stagnated amid a cooling global economy.

Citigroup Sekuritas Indonesia’s head of Indonesia research, Ferry Wong, said on Dec. 10 that the new Cabinet was more business-friendly as all its members were committed to tackling business red tape to attract more investment into the country.

“Their commitment is shown in regulations that are being pushed by the government to address restrictive and conflicting policies and revisions of the Labor Law and Oil and Gas Law, among other things, to create a more favorable environment for businesses,” he said.

Such a commitment for reforms, Ferry continued, could be positive sentiments in the stock market and encourage more investors to put their money in Indonesian shares. Some of the sectors that could reap the benefits of improving political stability include banking, health care, telecommunications and consumer goods.

“High internet penetration and the rising popularity of e-commerce and internet of things will boost telecommunications stock prices this year,” Ferry explained, projecting the index to hit 7,050 by the end of 2020.

Hariyanto Wijaya, Mirae Asset Sekuritas Indonesia equity analyst, wrote in a research note on Dec. 15 that investors had waited enough last year.

“This means that investment growth should recover after slowing down in 2019,” he wrote.

Aside from the growth in investments, he also expected to see a stable rupiah against the US dollar and recovering crude palm oil (CPO) prices to boost the growth of listed companies’ earnings per share (EPS) from last year’s 3 percent to 9 percent in 2020.

“The significant recovery in CPO prices since last October should boost purchasing power and household spending,” he added.

He projected the JCI to reach 7,140 by the end of 2020, with sectors like consumer goods, industrial estates, metal mining and poultry to be the most attractive ones. 

Last year, the finance and basic industry and chemicals sectors booked the highest growth of more than 14 percent yoy, while the consumer goods industry and mining recorded the biggest contractions.

Although the government’s reform efforts — in the form of omnibus laws — will not take effect until 2021, their deliberation is expected to inject a positive sentiment into the stock market in the second half of 2020, said Mandiri Manajemen Investasi president director Alvin Pattisahusiwa.

“The [omnibus laws] won’t take effect until 2021, but market players are already factoring in the impact six months before,” he said.

The government is preparing at least three omnibus bills on job creation, taxation and on small and medium enterprises (SMEs). If passed, the laws are expected to amend more than 1,000 articles in prevailing laws that are said to have deterred investments.

The bond market, meanwhile, will not share a similar optimism. According to Mandiri Sekuritas fixed income analyst Handy Yunianto, the country’s debt market in 2020 will not be as bullish as the year before.

“Bond yield will lower to around 7 percent in 2020 from last year’s 8 percent,” he said on Dec. 19, adding that capital
gain was also expected to decline, causing a drop in bond market returns.

“However, yield-hungry investors will still be tempted to invest in emerging markets, including Indonesia, as global interest rates remain low,” he said.