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Country Assessment
Regional Equity Strategy Q4 2007
MARKET REVIEW
Following an extended bull run and the JCI having reached a historic of high at 2,401, the Index
plummeted 20% to 1,909 following the sub-prime mortgage crisis. The JCI suffered more than
regional markets, falling >5% for two consecutive days. Risk aversion seemed stronger in 3Q07
than the previous quarter. Big caps outperformed small caps by 4.8% as investors shifted to safe
havens. Furthermore, the declines on 15 and 16 August showed that Indonesia, a peripheral
market, was more volatile than regional markets amidst the global downturn.
Sharper decline and higher volatility – is Indonesia’s market really that bad? No, in our view the
market is still relatively bullish with data showing inflows to mutual funds during the market
downturn. There was a total of Rp2.0tr net inflow to equity mutual funds in the first two weeks
of Aug 2007. This implies investors could have remained sidelined in anticipation of a quick
recovery in the equity market.
Net Subscription In Mutual Fund
Rptr
Fixed Income
Rptr
Rptr
Equity
Rptr
8,000
30,000
8,000
22,000
6,000
27,500
6,000
20,000
18,000
4,000
25,000
4,000
16,000
2,000
14,000
2,000
-
Jan Feb Mar Apr May Jun Jul Aug
22,500
20,000
-
(2,000)
Jan Feb Mar Apr May Jun Jul Aug
12,000
10,000
8,000
Net Subscription (LHS)
Source: Bapepam
NAV (RHS)
Net Subscription (LHS)
NAV (RHS)
SENTIMENT AND LIQUIDITY
We do not expect strong positive sentiment in 4Q07, unlike in early 3Q07, due to sub-prime
related volatility. In the next one or two months, we foresee global sentiment to drive
movement of JCI as the impact of the US sub-prime mortgage crisis remains vague. However,
once global financial markets stabilize, we expect a rally in the equity market.
On the fixed income segment, money flow reversal was visible in Aug 2007, with c. Rp5tr
decline in foreign holdings of government bonds. A widening credit spread and increasing credit
risk premium curbed investors’ appetite for Indonesia government bonds. For the next two
quarters, DBS interest rate strategist expects a widening liquidity premium, with 2Y and 10Y
yield-spreads over BI rates reaching 25bps and 250bps from 18bps and 132bps, respectively.
In the end, the turmoil and money flow reversal resulted in a weaker Rupiah; the currency
weakened from Rp8,670/US$ on 22 Jul 2007 to Rp9,475/US$ on 16 Aug 2007. But whatever
the global sentiment, the driver of this market turmoil is exogenous, unlike the one that caused
the 1997 financial crisis.
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