Tuesday, October 16, 2007

Profiting from the stock exchange

There are many ways of making money, one of them being through a capital market. The Jakarta Stock Exchange (JSX), which was previously showing no signs of life due to the prolonged economic crisis, has revived.

In fact, the JSX has seen a significant increase in the number of transactions over the last five years. In previous years, transactions stood at only Rp 150 billion to Rp 250 billion a year. Today, the trading of shares and warrants can reach Rp 1.3 trillion. The Jakarta Composite Index has risen to 1.316.

Several stock exchange observers have said that there are several factors contributing to the revival of the Jakarta bourse despite the frequent but steady fluctuations.

First, the decline in the interest rate of Bank Indonesia promissory notes (SBI) has led to the decrease in the interest rate of time deposits, leaving this type of financial instrument less attractive. Under this condition, money owners, bank customers and investors prefer to utilize other investment instruments to gain a profit, such as shares and mutual funds.

Second are the external factors: the improving condition of stock markets in Asia, Europe and the U.S. in which share prices have bounced back and the number of transactions has also been on the increase since early this year. Third, the share price recovery in most bourses in the world, including the JSX, has prompted numerous investors to enter the country's stock exchange.

Aside from that, announcements on Indonesia's increase in long-term debt rating by such international rating organizations as Moody's Investor Service and Standard and Poor (S&P) have restored foreign investors' confidence in Indonesia.

International investors feel secure in investing in Indonesia, and today Indonesia's capital market is seen by foreign investors as one of the profitable stock exchanges.

The above-mentioned fundamental factors have, at least, led to a number of companies' growing eagerness to generate funds from the capital market.

Take Bank Bukopin, for example. Bukopin has followed in the footsteps of 24 other banks by entering the JSX through which it will offer 30 percent of its shares, equivalent to two billion shares at between Rp 350 and Rp 520 per share. The share offering is not only targeted at local investors but also those from other countries, such as Singapore, Hong Kong, London and Amsterdam.

By going public and by listing its shares on the JSX in July, Bank Bukopin management expects to generate funds amounting to between Rp 717 billion and Rp 1 trillion from the stock exchange. "We plan to use the funds for improving our capital structure," Bank Bukopin's president director Glen Glenardi said at a public expose in Jakarta on June 6.

According to banking observers, banking plays a significant role in moving the index. Apart from that, under the economic recovery program in which bank interest rates are kept at a low level, shares of sectors like property, cement, banking and automotive are attractive to investors. Other shares of telecommunication companies like PT Telkom and PT Indosat are also popular among investors. Other attractive shares include those of infrastructure companies, like PT Citra Marga.

Therefore, investors' interest in buying shares in bulk has resulted in the dramatic increase in share prices. Almost all prices of blue chip shares have jumped high in the last 30 days.

Certainly, the share price increase trend has a limit. When share prices reach their peak, selling commonly occurs. This has led to several popular shares coming under pressure.

As a result, in the short term, an opportunity to obtain gain from popular shares is small. And even in the long term, as capital market analysts have put it, investing in blue chip shares can be risky.

Under this condition, it is safe to buy second line shares. The second line share group is apt to be slow in following the movement of blue chip shares and, when the market is bullish and bearish, the second line shares tend to move slowly. And therefore, the analysts conclude, "Second line shares provide an appropriate buy alternative because they have room to strengthen," he said.

One thing is certain, and that is that in general the capital market remains attractive to investors. The capital market serves as an alternative investment instrument because it can give a higher return compared to that given by other investment instruments.

In fact, according to other analysts, shares are not the only profitable investment. Bonds, too, can be a profitable alternative. "The lowering interest rate will be reversed in the case of bond prices, which tend to rise," wrote Budi Susanto, a bond market analyst at Danareksa Sekuritas in an article appearing in Kompas daily on May 22, 2006.

The declining interest rate is connected to the bond price increase. This can be seen, for instance, in the declining SBI rate for 2002-2004, in which bond prices were in an upward trend while SBIs were at a low point in May 2004. However, in November 2005, when the interest rate was in an upward trend, bond prices also were apt to be on the increase.

It was not an anomaly. Market players were optimistic that the dramatic rise in inflation in October 2005 was only temporary and they predicted that the inflation rate would decline in the following months. It is not surprising then, says Budi, that the bond price drop provides a "time to buy" opportunity because investors believe the inflation and deposit interest rate will not decline in the distant future. "With the expected continued interest rate, market players seem to be aware that bond prices will rebound," he said.

This year, even though the last auction did not bring optimum results, analyst circles predicted that investing in bonds would remain profitable. And even government bonds are more secure and give high capital gain. Additionally, foreign investors' improving perception of the Indonesian economy has contributed to positive sentiment and will revitalize investment in commercial papers, even in commercial papers with the lowest risk, because the government has completed 90 percent of its state bond issuance for 2006.

The problem is: which is more attractive, bonds or shares? Seen from the viewpoint of characteristics, either shares or bonds can be a good investment alternative, depending entirely on the investment goal. For investors who are eager to be actively engaged in trading activities and have to secure liquidity, investing in shares is better despite the big risk.

Yet if priority is placed on optimum returns instead of liquidity, bonds can be a more attractive alternative -- particularly when investing in bonds can give a yield of between 12.5 and 13 percent. (Burhanuddin Abe)

The Jakarta Post
June 20, 2006

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