Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
How to Trade Binance Vanilla Options for the First Time on Bitcoin Crypto's - 2nd Aug 21
From vaccine inequality to economic apartheid - 2nd Aug 21
Stock Market Intermediate Top Reached - 2nd Aug 21
Gold at a Crossroads of Hawkish Fed and High Inflation - 2nd Aug 21
Bitcoin, Crypto Market Black Swans from Google to Obsolescence - 1st Aug 21
Gold Stocks Autumn Rally - 1st Aug 21
Earn Upto 6% Interest Rate on USD Cash Deposits with Binance Crypto Exchange USDC amd BUSD - 1st Aug 21
Vuze XR VR 3D Camera Takes Near 2 Minutes to Turn On, Buggy Firmware - 1st Aug 21
Sun EXPLODES! Goes SuperNova! Will Any planets Survive? Jupiter? Pluto? - 1st Aug 21
USDT is 9-11 for Central Banks the Bitcoin Black Swan - Tether Un-Stable Coin Ponzi Schemes! - 30th Jul 21
Behavior of Inflation and US Treasury Bond Yields Seems… Contradictory - 30th Jul 21
Gold and Silver Precious Metals Technical Analysis - 30th Jul 21
The Inadvertent Debt/Inflation Trap – Is It Time for the Stock Market To Face The Music? - 30th Jul 21
Fed Stocks Nothingburger, Dollar Lower, Focus on GDP, PCE - 30th Jul 21
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
WEALTH INEQUALITY WASN'T BY HAPPENSTANCE! - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Current Jakarta Composite Stock Index Index Run Up Sustainable?

Stock-Markets / Stock Markets 2014 Apr 07, 2014 - 10:57 AM GMT

By: Sam_Chee_Kong

Stock-Markets

The recent run-up of the Jakarta Composite Index has nothing to do with improving fundamentals in the Indonesian economy but more towards an election play. For all is known, the Indonesian economy is far from out of the woods. Although recently the Indonesian economy managed to record trade surpluses, it is mainly due to the rise in exports. Exports are brought forward from the mining sector as a result of an anticipated ban on mineral exports after Jan 12, 2014.  Moreover the sudden surge in the economic activity for the past few months has mainly due to the increased public spending geared towards the run up of the elections. Whatever it is, the Indonesian economy is still very weak and will have problem maintaining the momentum as soon as the elections ends next week.


Current Account and Balance of Payment

Despite scoring positive growth in its trade balance, however the current account is still in the red due to an increase in the net income transfer out of the country. The following is Indonesia’s current account as from 2008 till March 2014. As can be seen, Indonesia’s Current Account has been in deficit since the end of 2011. The current account has in totality a deficit of $28.45 billion for the year 2013.

Indonesia Current Account

Thus, this helped contribute to a Balance of Payment deficit of $7.32 billion as shown below. This is the first balance of payment deficit since 2008 and it shows that the Indonesian economy has started to slacked.

Indonesia Balance of Payment from 2008 - 2013

Inflation Rate

The Indonesian economy recorded an inflation rate of 7.32% in March 2014. As seen from the inflation chart below, Indonesia’s inflation rate has risen quite aggressively since July 2013. The overall inflation rate for the Indonesian economy has jumped to about 6.97% in 2013.This coincides with the depreciation of the Rupiah in July 2013 when there was a capital flight from emerging market economies. Thus the rise in the imported goods especially the fuel segment has contributed to the rise in the inflation rate. Whatever it is an inflation rate of about 7% is considered high and thus will negate any increased in the standard of living due to a rise in the income level of ordinary Indonesians.

 Indonesia Inflation Rate

Interest Rate

Interest rates had risen from a low of 5.75% in 2012 to 7.5% since July last year. Raising the interest rate level is unavoidable because it was one of the stop go policies adopted by the Indonesian Government to stem the outflow of foreign capital last year. Since the last Global Financial Crisis in 2008, Central Bankers has been intervening into the credit market by lowering the interest rate. What happens when interest rates starting to creep up again as in the case of Indonesia shown by the following graph?

Historical Data Chart

How does it affect both investors and companies?

Low interest rates acts as a stimulant to economic growth because it help to provide cheap credit to businesses and consumers. When borrowing costs is cheaper, businesses can afford to invest in technologies, machineries and other factors of production to expand their business. Consumers are more willing to take on a bigger credit so that they can spend on big ticket items such as cars, houses, travels and other luxury items. More are willing to put their money into the stock market instead on term deposits in order to increase their return. Thus, a virtuous cycle of economic activity has begun and everyone benefits.

What happens when rates starting to climb?

Obviously, businesses will start to re-evaluate their business plans as they are uncertain on how long the higher rates will prevail. Thus, they will be holding back their expansion plans and adopt a wait and see attitude. As for the consumers, they too will be cutting back on their spending especially on credit cards, big ticket items and investments that are directly affected by the rise in the interest rates. But what will happen to asset prices?

Most asset prices move inversely with interest rates. As for the corporates, a rise in the interest rates will affect the yield of their bonds and hence raising money through the issuance of bond will be prohibitive and so does bank credits. As for the investors, it will negate their attitude towards the stock and real estate investment as they are very sensitive to rate hikes. This is because not only alternative investment such as term deposits offers higher returns but it is also very prohibitive for investors to borrow money from their margin account to bet on stocks. As a result, they will either unwilling to commit or delay their purchase of real estate due to the higher costs of borrowing.  Inevitably, this will help slow down the economy in the short and medium term.

GDP Growth

The Indonesian economy recorded a GDP growth of about 5.8% in 2013 which is a slight drop from 2012 recorded 6.2%. In essence, this can be considered quite an achievement since most Western economies are growing at less than 3%. But what is reported is the nominal GDP meaning it hasn’t taken into consideration the inflation rate. To obtain the real GDP, the nominal GDP will have to minus the inflation rate. Indonesia recorded a slowest growth in its GDP in 2013 (5.78%) since 2009. This is mainly due to the rise of the inflation rate in the past few months as seen above.  Thus it can be concluded that the Indonesian economy is experiencing a negative growth rate.

Indonesia GDP Annual Growth Rate

Conclusion

The recent run-up of the Jakarta Stock Exchange has nothing to do with the so-called improving fundamentals although recently the Indonesian Government announced that they are running a trade surplus. These are part of election gimmicks designed to boost the popularity of the incumbents. The following is the Jakarta Composite Index from October 2013 till April 2014. If you are a sharp investor, a glimpse will tell you that the chart is in trouble. Why is it so?

Firstly, the ticker price and indicators are already showing divergence. The JCI kept going up while both the MACD and RSI indicators kept going down. This shows weakness in the trend and it is about to turn very soon.

Secondly, the current rise in the Composite index is not being followed through with much confidence as volume keeps tapering off. Lack of volume shows there is a lack of commitment from investors and distribution is also underway. Thus, it can be concluded that smart money are already on the way out.

Thirdly, It seems like a double top is forming and with heavy volume. It coincides with the panic sell level that was set way back in June 2013. The panic sell level will act as the resistance and will prevent the market from going any higher. Unless the market overcomes the resistance with heavy volume, it will risk heading for a correction next week. Looking at the volume traded for the past few weeks a sharp correction will be in the offering very soon.

Thus, what we are seeing in the Indonesian scenario is where we are witnessing how a bad economy is support a strong stock market. Needless to say, such a scenario is not sustainable in the short and medium term. I reckoned the Jakarta Stock Exchange will have a rather large correction as soon as next week.

by Sam Chee Kong

Samcheekong.blogspot.com

cheekongsam@yahoo.com

    © 2014 Copyright  Sam Chee Kong - All Rights Reserved

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in