Weekly Report 10 December 2007

11 12 2007

Weekly Outlook : The central bank’s decision to cut interest rates provides the impetus for further gains in share prices this week as the year-end approaches. As we had earlier noted, share prices have risen in every December in the last six years – and this year looks like being no exception. And expectations of a cut in interest rates in the US should also add to the positive market sentiment. Thus, against this backdrop, sentiment on the domestic bourse should remain upbeat this week with the JCI heading toward the 2,800 level.

Stocks listed on the Indonesia Stock Exchange, formed by a merger of the Jakarta and Surabaya bourses, rose to new highs last week. The main index even broke through the 2,800 level at one point, although shares later gave up some of their gains on profit taking. Over the week, the index closed 90.62 points higher at 2,778.95. The gains in stock prices were supported by a number of factors. First of all was the unexpected move by the central bank to cut its benchmark interest rate from 8.25% to 8%. This move reassures investors that inflationary pressures are not as strong as earlier feared despite the high oil prices, i.e. the longer-term inflation rate is still benign. On the domestic front, the issue concerning government plans to rein in fuel subsidies remained in the limelight. Yet hopes that the oil price was on the way down – it’ s fallen by more than 13 percent from its recent high – suggest that the government may not have to implement such plans. And even if they do, the idea of requiring private motorists to use nonsubsidized fuel is now becoming increasingly more accepted since the less well off – such as those who use motorcycles or public transport – would not be affected. Doubts, however, remain over implementation.

The central bank’s decision to cut interest rates provides the impetus for further gains in share prices this week as the year-end approaches. As we had earlier noted, share prices have risen in every December in the last six years – and this year looks like being no exception. This phenomenon is most likely due to “window dressing”, that is the tweaking of portfolios by fund managers such that year-end balances are in line with their investment objectives. One of the tricks employed is to cull from the portfolio any stocks with significant losses and to replace them with stocks that have recently performed well. This makes the managers look smarter on their client reports since the stocks in the portfolio will be the year’s good performers. As a result of such window dressing, the prices of the year’s weakest performing stocks may tend to fall further in December, while the outperformers may tend to rise further.

Meanwhile, expectations of a cut of interest rates in the US should also add to the positive market sentiment. The Fed meets on 11 December to weigh over the arguments for a rates cut. Although many still expect a rates cut – most probably by 25bps – the chances have receded somewhat given the strong jobs growth data – the US economy added 94,000 jobs in November. Download Full Report


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