Vincent Lingga, The Jakarta Post, Jakarta Thurs, 10/9/2008
The capital market management and regulator made the right decision Wednesday to halt share trading here after the benchmark index plunged by another 10 percent to close at 1,451 points, because that development was indeed rooted in an irrational market mechanism.
Letting the stock market (IDX) continue operating in such a chaotic situation would be like allowing a few rice sellers to freely set the price of the staple amid a massive, nationwide famine.
Stocks in such blue-chip companies as telecommunications firm Indosat, coal producer Adaro and automobile and plantations group Astra International should not have plunged between 19 and 23 percent Wednesday, had it not been for a herd mentality on the part of domestic retail and institutional investors.
The long-term outlook for telecommunications and our natural-resource-based companies remains bright and promising. Even though the prices of most primary commodities such as coal, palm oil and rubber have of late fallen steeply, they remain way above their 2006 levels.
The recent downward trend was even good for long-term stability, because the skyrocketing prices during the first semester were partly fueled by speculative sentiment. These prices are now seeking a new equilibrium.
Our domestic investor base should have been broad and diverse enough to shield the IDX from the abrupt changes in international investor sentiment.
The growing role of domestic institutional investors such as pensions funds, mutual funds and insurance companies should have contributed to broadening and diversifying the pool of investment in equities.
The long-term horizon of these institutional investors should have played a stabilizing role in our stock market. Basically, a diverse investor base, in relation to investment horizons and risk appetite, can contribute to financial stability by spreading risks more widely.
But as Wednesday's irrational market development showed, most domestic investor behavior was still controlled by a herd mentality, toeing the move of foreign portfolio investors.
What are the main determinants of share prices?
One of them is global factors, such as international liquidity and credit and market risk premiums. True, these factors are now all negative, as the impact of the financial crisis and panic in the United States and Europe sets in.
However, the strongest determinants of our equity prices -- the domestic or fundamental factors such as economic growth, the differential between domestic and global interest rates, the expected forward exchange rate, the inflation differentials -- remain fairly positive.
In fact, after Bank Indonesia's move on Tuesday to raise its benchmark interest rate by another 25 basis points to 9.50 percent, our interest rate differential with the U.S. Fed funds became 8 percentage points.
I don't think the amount of foreign portfolio money still playing in our stock market remained at such a level because it was still able to heavily influence the market trend.
Most of this hot money had flown out a few weeks ago as these skittish investors became highly risk-averse and tended to generalize things.
The steep fall in our stock market Wednesday was therefore exacerbated by the herd mentality and short-term-oriented stance not only of our individual (retail) but also institutional investors.
Hence, as BI Governor Boediono and chief economics minister Sri Mulyani Indrawati said Sunday, if we really care about protecting our own house from the fallout of the international financial crisis, then we all, in our respective roles, should help contribute to maintain calm.
This calls for domestic retail and institutional investors to get rid of their herd mentality and adopt a more long-term view in order to contribute to building up a financially stable base for our equity market.
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