The Number of Covid-19 Cases And Unemployment Rate Are Increasing, How Come IHSG Is Also Rising?

Hi Moduers,

 

The equity market usually projects a country’s economic situation which translates to economic data such as the gross domestic product, inflation rate, interest rate, transaction volume and the rate of unemployment. But there is something unusual happening in 2020.

 

On July 13, 2020, the S&P 500 has returned levels to when it was at the beginning of 2020. After the economy suffers a sharp economic decline, then quickly and strongly recovers, this is known to be the V-shape recovery (shown in the graph below).

 

 

US Equity S&P500 Index

 

If we look carefully at the current situation in the United States, daily Covid-19 cases has been increasing exponentially yet the unemployment rate continues to rise far beyond the pre-pandemic era.

 

Daily New Cases in the United StatesUnited States Unemployment Rate

 

So what is the cause of rising stock market in the United States?

 

The reopening of the economy after a lengthy lockdown can induce a state of euphoria in the market. In addition, a more influential factor is the massive stimulus being released by the Federal Reserve (the Fed). The Fed had poured around US$ 3 trillion to the market resulting in a sharp increase of supply in money to the United States. With US deposit rates ranging from 0-0.25% and 10-year bond yields at around 0.6%, it is not a surprise that investors in the US will prefer the stock market and expect a near economic recovery.

 

How about Indonesia?

 

The number of Covid-19 cases in Indonesia has also increased. Many companies have started laying off employees. The government is trying to control the situation by providing various stimulus one of which is a policy by Bank Indonesia (BI) to reduce the number of Statutory Reserves by 200bps in April 2020. BI has also reduced the benchmark interest rate level to 4.25%. These were some of the many factors that had increase market liquidity.

 

Although the JCI has not returned to levels seen at the beginning of 2020 (like the S&P500 index in the United States), curb easing has also played with the euphoria effect which caused the JCI to rise to 5,072 on July 14, 2020.

 

Indonesia Equity JCI Index

 

What should Moduers do as a mutual fund investor and especially with equity mutual funds? Considering the JCI valuation and comparing current levels to the beginning of 2020, the current level is attractive for equity funds because of the potential long-term gain. But before taking any action, bear in mind the basics; plan your investment objectives and the duration your investment. Risk profile can be a reference to the portion size of your equity funds investment but do not rush into equity mutual funds just because of FOMO (Fear of Missing Out).

 

For more information on investment in mutual funds, Moduers can access the link below:

 

 

#ModuitRegards

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