Indonesia: Yield & Stock Market

Indonesia – a truly beautiful country.

KT

Indonesia’s stock market is even more beautiful, rising more than 4.7x since 2008:

JCI.png

There are many factors that may create thrust for a particular stock market. One such factor is the level of interest rate in the country. From a common sense point of view, we may be able to generalise the fact that the required equity rate of return is expected to fall in tandem with a falling interest rate environment, thereby this may potentially boost the valuation of equity market. The following chart compares the Jakarta Composite Index (JCI) and 10Y Indonesian Government Bond Yield (since Jan 05 – 19 Oct 2017), of which a negative relationship  appears to exist between the equity index and the bond yield.

Time Series_JCI vs 10Y Indo Gov Bond Yield.png

Regressing The Relationship

Statistical relationship is quite significant between the yield and the equity index:

Regression Relationship.png

Based on the above regression analysis / relationship, at current 10Y bond yield of 6.618%, the predicted forecast JCI value is 4,601 which is relatively lower than current index point of 5,929 but it is nevertheless within the 95% confidence range of between 2,844 –  6,357 points.

Forecast.png

A key question to ponder:

Will the Indonesian central bank continue to lower the rate?

Unless there is recovery in domestic consumption / lending, Indonesian Central Bank may continue to cut rates to boost the economy. However, if  global QE is to end / moderate, we may actually see a rising yield environment due to potential outflow of foreign funds.

Aug 17 – JAKARTA: Indonesia’s central bank on Tuesday cut its benchmark policy rate for the first time since October, unexpectedly pulling the trigger in a bid to boost sluggish lending and growth in South-East Asia’s biggest economy.

In another effort to stoke lending and consumption, Bank Indonesia (BI) also said it would change downpayments on automotive and home loans and review bank liquidity rules.

“The theme of this monetary policy meeting was to lower the benchmark policy rate due to stability and to support economic recovery,” BI governor Agus Martowardojo told reporters. Martowardojo said external risks, including those involving policy of the US Federal Reserve, had been reduced. BI cut the 7-day reverse repurchase rate to 4.50 % and lowered two other main policy rates.

Indonesia becomes the second major Asian economy to cut its policy rate this year after India on Aug 2. In a Reuters poll, 19 out of 20 economists forecast that BI would hold the key rate at 4.75% out of concern changes in other countries’ monetary policies could hurt the rupiah .
Read more at http://www.thestar.com.my/business/business-news/2017/08/22/indonesia-c-bank-surprises-with-rate-cut-in-bid-to-spur-growth/#0T7SHw67ie9IKweZ.99

 

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Author: Ken Utau

Markets Observer + Food Lover

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