TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Can a dead cat bounce?
As said by Robert Shiller, a Nobel laureate in Economics, financial investors have anxiety from two pandemics, one is from the coronavirus pandemic and the other one is pandemic of panic due to the economic consequences of the virus: two different correlated pandemics.
Change Size
The trading floor of the Indonesia Stock Exchange (IDX) in this file photo shows a decline on the Jakarta Composite Index (JCI) monitor. (thejakartapost.com/Wienda Parwitasari)
I
ndonesia equity and bond markets have rebounded nicely since their lowest in March. The Jakarta Composite Index (JCI) and LQ45 Index increased by 19 percent and 24 percent, respectively, from March 24 to April 15. Similarly, the Indobex Government Bond Total Return Index also rose by almost 2 percent during the same period.
It was an odd phenomenon considering the sharp correction in the markets was started by fear of the spread of COVID-19 and its impact on economies and businesses. As said by Robert Shiller, a Nobel laureate in Economics, financial investors have anxiety from two pandemics, one is from the coronavirus pandemic and the other one is pandemic of panic due to the economic consequences of the virus: two different correlated pandemics.
It is true that, according to World Health Organization data, global daily confirmed cases have consistently declined day-to-day since April 11. So has the mortality number. The whole issue is still far from over until new cases and mortality stop. Afterwards, each economy will still need to find a way to restart and gradually back to precrisis levels, which will take some time.
The rebound in risky asset prices globally, including stocks and bonds in Indonesia has been in line with the strengthening of emerging market currencies. Monetary stimulus by central banks of developed nations weaken the developed currencies more, thus lifting emerging countries’ currencies.
The rupiah has appreciated strongly – by almost 6 percent – since the end of March and has been one of the best performers among emerging market currencies during the period. The potential depreciation in the US dollar due to an extravagant monetary stimulus by the Fed seems to outweigh investors’ worries about further rupiah depreciation.
A stronger rupiah does help the stock and bond market, but only as a temporary remedy until the underlying issue is resolved. The effect of monetary stimulus has its limit, and once it is reached, the increase in stock and bond prices may lose steam. As long as the spread of COVID -19 and mortality have not stopped, the market rebound will be short-lived and will be in danger of retreating back to lower levels in the short term.
Therefore, investors should not cheer too early about this rebound and should not depend on short-term expectations. Expecting instant results will increase the probability of disappointment because it is impossible to predict price movements in capital markets accurately and consistently. During abnormal times like this, it is even more difficult.
The recent example of the sudden price rebound caught shortterm forecasters off guard because they predicted the worst would happen during a low market, that is, the JCI to drop to 3,000 and the rupiah to weaken to 20,000 per US dollar. Now during the up-market, they have to change their predictions that good things will continue to come. Their followers should prepare for more flaws.
Instead, investors should focus on the long-term prospect of their investment portfolio and see how it fits their long-term needs. Estimating the long-term returns of good-quality securities is more likely to produce an approximately right result than precisely wrong in the case of short-term forecasting.
Long-term investors applauded during the low market because of their ability to invest at attractive valuations, and they are unintentionally enjoying a gain at the moment. Further, at the current still-low valuation they can patiently invest without worrying about tomorrow’s price setbacks.
Learning from the past, during early corrections in 2008, JCI fell by 20 percent in the first quarter, but it recovered by 10 percent in the second quarter and gave temporary hope to investors. Unfortunately, then it dropped by over 50 percent until the fourth quarter. Those who gave up due to disappointment about short-term fluctuations missed a 30 percent annual return in the following five years.
I am optimistic that the spread of the virus will stop. Further, Indonesia and the global economy will recover. Along with that, prices of stocks and bonds of many good-quality companies will surpass their pre-pandemic levels because strong business models and balance sheets will always thrive.
It will take time, but we will get there.
***
Head of investment at PT Avrist Asset Management. This is a personal opinion.
