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Over the last 10 years as an investment analyst certain prinicples, which we followed, have allowed superior returns to be achieved. In the next two years in Indonesia we feel above average returns can be achieved if these principles are again applied.
Empirical evidence shows that market biases or misinformation lead company share prices to frequently trade away from there 'fair value'. Examples of biases that create these distortions include:
- A lack of information on a company giving rises to false expectations;
The Indonesian market is again moving away from the international radar screen and research coverage is reducing.
- A bias against selling at a loss;
After 12 months of declining market performance many investors are sitting on losses.
- The perceived importance of a specific factor such as a political stability;
Every issue on the capital markets reverts back to this.
- Using past performance as a guide to the future;
In Indonesia it generally relates to very recent past and has a substantial impact on the near term future.
- An element of 'following the herd' and bias towards 'good' stocks because they are safe or prudent. Foreign investors and local funds flocking to the large relatively safe Morgan Stanley Capital Index stocks.
We believe you can exploit these market inefficiencies. In the short-term, share prices overreact to market biases or 'noise'.
However we believe that in the medium-term the market is semi-efficient (in emerging markets) and will reward those investors prepared to exploit pricing inefficiencies, or in other words, those who have identified 'undervalued' or 'overvalued' stocks
Empirical Evidence to assist in selecting the right listed investments in Indonesia
No single investment style works all the time, whether it is applied to stock picking or market selection. A discipline that indicates when to use which style could help investors avoid the dry spells inherent in any scheme that values assets according to fixed criteria regardless of changing market conditions. Relative value and relative strength are obvious candidates for a style-timing strategy. They are strongly negatively correlated; when one of these two styles is out of favor, the other likely to be in favor.
Financial Analysts Journal, March-April 1995.
In Indonesia at the current time, either investors have moved into the safer sectors or have exited the market given its significant under-performance over the last 12-18 months. At the moment the market is showing high relative value and low relative strength, indicating that a tilt towards Indonesia maybe warranted.
After periods of high volatility, growth tends to outperform value, small-capitalization stocks tend to outperform large-cap stocks, leveraged stock to be rewarded, previously successful stocks tend to be penalized.
The explanation posted for this link between volatility and style performance comes from behavioral finance. When the market is turbulent, the prospective reward for holding assets perceived to be riskier increases as nervous investor's risk tolerance decreases and they pay a premium for comfort and overall assets they believe to be risky.
Financial Analysts Journal, March-April 1995.
The market has experienced a period of negative volatility, value stocks have under performed, small capitalization stocks have under performed and leveraged stocks have under performed. On a turnaround we would expect these stock groups to outperform.
