Growth driver: The entrance to the BI headquarters in Jakarta. The central bank has preempted the Fed’s move by trimming the BI-Rate by 25 bps to 6%, stimulating economic activity by making loans cheaper for both businesses and individuals alike. — Bloomberg
JAKARTA: With the recent benchmark rate cuts by the United States Federal Reserve (Fed) and Bank Indonesia (BI) signalling an end to the period of high interest rates, analysts are turning bullish on equities and corporate bonds.
However, they cautioned investors to look for stocks with solid fundamentals and high dividends over lingering fears of a US recession in global markets.
The Fed slashed its federal funds rate by 50 basis points (bps) on Sept 18 to a range of 4.75% to 5%, the first cut in more than four years. The US central bank also hinted at an additional 50 bps cut before the year-end, with another potential cut of 100 bps on the horizon in 2025.
Just hours earlier, BI preempted the Fed’s move by trimming the BI-Rate by 25 bps to 6%. Interest rate cuts generally stimulate economic activity by making loans cheaper for both businesses and individuals.
At the same time, reduced yields on safer assets, such as US government bonds might push investors toward riskier investments with higher returns in domestic and international markets.
Fanny Suherman, retail research head at brokerage BNI Sekuritas, noted that retail investors could seize the opportunity to seek assets offering returns above inflation.
She highlighted that stocks in the finance, property and consumer goods sectors could benefit from the back-to-back rate cuts and from next year’s state budget, which is seen to support consumer spending.
“There is a potential for the stock market to reach an all-time high, driven by aggressive buying from foreign investors, as they see positive prospects for Indonesia’s economy,” she told The Jakarta Post on Sept 25.
She advised caution, however, and recommended stocks with high dividend yields and strong fundamentals, citing concern about a possible US recession.
Vivi Handoyo Lie, investment research head at investment platform Bibit, said this was not a good time to be sitting on too much cash, suggesting that retail investors might want to reduce the allocation of time deposits in their portfolios, as the returns on those assets would diminish amid the rate cuts.
Stocks, especially in the banking, property and automotive sectors, would benefit from foreign fund inflows and lower financing costs, she forecast. “Commodities could also see positive movement if China’s stimulus proves effective in boosting growth. However, it’s important to focus on the quality and valuation of the stocks, not just short-term gains,” she told the Post on Oct 1.
Vivi opined that Indonesia’s stock market valuation was low compared to other emerging markets, despite the IDX Composite index hitting an all-time high of 7,905 on Sept 19 – from which it has since retreated significantly.
She therefore suggested using dollar-cost averaging, a strategy that entails investing fixed amounts regularly over a certain period of time, instead of acquiring the desired position immediately, to reduce the risk of buying at a market peak by smoothing out the cost per share.
Aside from stocks, Vivi recommended retail investors to increase their exposure to bonds, either by purchasing them directly in the secondary market or through mutual funds.
Bond prices typically rise when interest rates fall, and the Indonesian government charges a tax of just 10% on interest earned from bonds, compared to the 20% tax rate on time deposit gains. — The Jakarta Post/ANN
