March 04, 2025

Falling Off a Cliff

Market Commentary

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JCI has dropped by 9.88% YTD, currently sitting at IDR 6,380.41 after reaching a peak of IDR 7,257.13 earlier in the year. The index also hit a recent low of IDR 6,270.60, marking a sharp decline.

JCI is one of the worst-performing indices in Asia, down nearly 10% YTD. Indonesia’s budget cuts and capital outflows are possibly the major contributors to its poor performance. Japan and India are leading the region with positive gains, while China and South Korea show mixed results.

Over the past few weeks, JCI decline influenced by various global and domestic factors such as: U.S. Trade Policies, Federal Reserve's Monetary Stance, Budgetary Measures, and last but not least, the heavy foreign outflow.

The chart shows periods of large spikes and deep drops in net foreign buying. Recent periods show consistent negative net buy (outflows), meaning foreigners are selling more than buying. Some major sell-offs coincide with key moments of JCI decline. Foreign outflows is likely a major driver of JCI’s drop.

However, we might also want to take a look at US Treasury yield performance. The negative correlation between Jakarta Composite Index (JCI) and U.S. Treasury yields is a common phenomenon in emerging markets. When U.S. Treasury yields rise, investors tend to pull capital from riskier assets, such as Indonesian equities, and move towards safer, higher-yielding U.S. bonds.

10 Year US Treasury Yield (white) vs. JCI Index (blue)

In the last part of the chart, the spread between JCI and U.S. Treasury yields has widened significantly. This suggests that:
1. JCI's decline has been sharper than expected, possibly due to concerns over government spending cuts and capital outflows.
2. U.S. Treasury yields may have stabilized, but JCI has yet to recover, deepening the divergence.

The narrowing of this spread depends on several geopolitical and economic factors in Indonesia:
1. Government Policy & Fiscal Adjustments: The Indonesian government's spending cuts (IDR 306 trillion) might negatively affect growth. However, if policies to stabilize the economy (such as incentives for FDI or stimulus measures) are introduced, JCI could recover, narrowing the spread.
2. Foreign Investor Sentiment: If the Federal Reserve signals rate cuts, capital might flow back to emerging markets, supporting JCI. However, Indonesia needs strong political and economic stability to attract these inflows.
3. Geopolitical Stability: If political risks (such as post-election uncertainties or regulatory changes) remain low, investors might regain confidence in Indonesian equities.

In our view, the short term view is that the spread may stay wide if outflows continue and government policies remain uncertain. While for the mid-to-Long Term, the spread should gradually narrow once market confidence returns, particularly if the Fed eases rates and Indonesia stabilizes its economic outlook.

All things considered, we suggest investors to remain cautious until further clarity on Indonesia economy and geopolitical outlook reached. We see that having neutral stance on Indonesia equity is wise under current circumstance.

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