High Interest Rate Sentiment in the Stock Market Lasts a Long Time

Interest rate sentiment impacted the automotive sector, but the energy and raw goods sectors were the main movers in May.

KOMPAS/PRIYOMBODO

The finalists of Puteri Indonesia 2024 posed for photos after undergoing financial literacy training through an introduction to capital market investments at the Indonesian Stock Exchange in Jakarta on Monday (26/2/2024). This training is an effort to encourage young generations and women to become investors in Indonesia's capital market.

JAKARTA, KOMPAS — The central bank's decision to maintain high interest rates until the end of the year has become a negative sentiment for capital market. The effect is expected to last a long time, causing stock exchange performance to weaken in the future.

The results of a survey of market players by the Indonesian Securities Analysts Association (AAEI) and CSA Community entitled CSA Index for May 2024 which was released on Monday (6/5/2024) concluded the target movement for the Composite Stock Price Index (IHSG< /a>) which was negative in May.

JCI is estimated to only move around the level of 7,100 or grow negative 1.85 percent on a year-to-date basis. This weakening comes from the assumption that monetary sentiment is still tight, partly due to the uncertainty over the potential for cutting interest rates by the US central bank, the Federal Reserve or The Fed, which will put pressure on the rupiah exchange rate.

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DANAMON

Graphic depicting the projected interest rate policies of Bank Indonesia and The Federal Reserve until 2025.

AAEI considers that The Fed's policy of maintaining its interest rates actually signals that there will be no more interest rate hikes and that a reduction will be made once the inflation target is reached. On the other hand, uncertainty and negative sentiment still loom over projections of the performance of issuers in the future.

However, the projected US policy which was taken into consideration by Bank Indonesia (BI), raising the benchmark interest rate to 6.25 percent yesterday, could have the impact of slowing down the projected economic growth in the future. The slowdown could occur even though economic growth in the first quarter of 2024 grew solidly at 5.11 percent.

The Bank Danamon Treasury Economist Team in their May report also predicted that The Fed's interest rate cut would only be 25 basis points in December 2024, which is less than their previous estimate of up to two cuts.

As for Bank Indonesia, it is estimated that they will not decrease interest rates until the end of the year. Therefore, the cycle of decreasing BI interest rates will start at the earliest in the first quarter of 2025, with a focus on normalizing the difference between the BI rate and The Fed to ensure rupiah stability amidst the widening deficit in current transactions.

The automotive sector is affected

Danamon predicts that the interest rate sentiment will impact investment sectors such as the automotive industry. During the first quarter of 2024, this industry is expected to experience a significant decline, marked by a yearly 23.9% decrease in four-wheeled vehicle sales.

This decline is mainly driven by the decline in passenger vehicle sales, particularly in the energy-efficient 4x2 car segment with affordable prices, which together contributed 10.3 percent to the overall decline. The decline indicates a significant shift in consumer behavior and preferences in the automotive market.

In addition, external factors also worsen the challenges faced by this industry. Geopolitical tensions, weakened global demand, and higher interest rates for longer periods of time all burden consumer purchasing power.

KOMPAS/RADITYA HELABUMI

The atmosphere of the launch of VinFast, a locally produced Vietnamese car for the Indonesian market, at the Indonesia International Motor Show (IIMS) 2024 event in JI Expo Kemayoran, Jakarta on Thursday (15/2/2024).

These external pressures have added to consumer uncertainty in taking out new loans, especially for large purchases such as new vehicles. The latest banking survey highlights a trend of decreasing loan demand. The value of new credit disbursed in the first quarter of 2024 was 60.8 percent, lower than the previous quarter's 96.1 percent. The decline in credit disbursal is expected to continue in the second quarter.

Danamon also assesses that, in terms of components, demand for loans for motor vehicles is expected to decline in the next quarter.

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Driving sector

The CSA Index from the AAEI Survey looks at several sectors that will be the main drivers for the IHSG in May. These sectors include energy and raw goods such as mining industry issuers.

The energy sector, for the first time, has been mentioned as the primary choice of market players to replace the financial sector, which has long been the core of market players. The financial sector, particularly banking, is currently undergoing corrections due to projections of high interest rate policies.

On the other hand, the potential strengthening of energy commodity prices became the main driving force for positive performance of the energy sector index, which was able to grow by 5.94 percent throughout last April. This is in line with the factor that boosts the stocks of companies in the raw materials sector.

KOMPAS/PRIYOMBODO

Officials showcase the Chinese New Year-themed precious metals launched to enliven the Chinese New Year holiday at the Antam Precious Metals Boutique in the Setiabudi area of South Jakarta on Tuesday (6/2/2024). Precious metals with special themes like Chinese New Year are sought after by the public not only as investment instruments but also as collectible items due to their limited numbers.