Frequently Asked Questions (FAQ) Concerning Investments During Covid-19 Pandemic

The current Covid-19 virus is rapidly spreading and raising concerns in the community. So far, no vaccine or drug has been developed to effectively deal with the Covid-19 virus. Therefore, many countries have resorted to implementing social and physical distancing policies, regional quarantines and broad lockdowns such as in Italy, Malaysia and the United States. With these policies, social mobility and distribution of goods became limited, along with the decrease in the level of consumption and manufacturing productivity. As work-related activities decrease, businesses slow down, imports and exports experience disruptions and tourism declines, among others things. These reduced activities weaken economic growth and potentially lead to high non-performing loans and unemployment. In Indonesia, where the economy relies mainly on domestic consumption, a decline in consumption will greatly affect the country’s economic growth.

This is a possibility. Based on lessons learned from previous crises, however, governments worldwide are better prepared and can pinpoint problem areas to reduce potential recession. 
With the assistance of their respective central banks, governments around the world introduced fiscal and monetary stimulus packages to stem the effects of the Covid-19 virus. These packages included necessary measures to ensure continuous economic activities, especially with respect to maintaining employment. Recession occurs when an economy experiences a contraction for 2 consecutive quarters within a year.

We believe that economic stimulus packages and policies can be classified into two types based on their period of effectiveness: short-term and long-term. Currently, the government has been focusing on short-term stimulus policies such as social assistance and medical equipment needed to cope and reduce the impact of the Covid-19 virus. Once the pandemic subsides, long-term stimulus policies will play a vital role to help the economy recover. Since market players are still cautious about the spread of the Covid-19 virus, investment funds shift from high risk to low risk, thereby causing a significant decline in capital market instruments, such as bonds and stocks. Economic improvement will eventually lead to resumption of market players’ pre-pandemic activities, supported by sound government and central bank policies to restore the economy.

The world economy faces a number of challenges triggered by the outbreak of Covid-19. Global economic growth is expected to significantly decline from 3.0% in 2019 to 1.5% this year. The United States’ economy is looking at liquidity risks along with perceived risk of rising credit. In the domestic front, the weakening of the Rupiah exchange rate carries the potential of increasing the risk of corporate solvency if it extends for a longer period of time (>3 quarters). Indonesia's economic growth is also expected to decline from 5.0% in 2019 to 3.9% this year.
Source: Danamon Economic and Market Research

The current decline in the Composite Stock Price Index (JCI) is mostly driven by concerns or negative sentiment by market participants due to the Covid-19 virus pandemic rather than fundamental factors which can be considered quite conducive. This negative sentiment makes the level of decline difficult to predict, although market volatility will certainly still be high. 
According to Bloomberg’s JCI valuation, however, it has already been oversold with better fundamentals compared to 2008. Using the average share price to income (Price Earnings Ratio) approach in the last 5 years, the JCI by end of March 2020 posted lower than the 2008 global financial crisis. For additional information, the P/E Ratio of our JCI is currently within the range of 10 – 11 times with an average 5-year P/E Ratio of JCI at 15.7 times and average 15-year JCI average at 14.8 times.

If you are not comfortable with the current volatility, we advise you to discuss with our Relationship Manager/Officer to reassess your financial goals and investment risk profile. If necessary, you can reduce the risks of your investment portfolio through stock-based portfolios with a safer level. Please bear in mind, however, that every time a decline occurs due to a crisis without any significant fundamental change, the market tends to recover. In the last decade that was characterized by 3 crises, the market recovered after each crisis and increased even higher than before. The average recovery period was 17 months from the lowest point of the crisis.

Investment diversification and averaging are the best ways of investing to cope with the current situation. Divide your investment funds according to your investment profile. Then invest according to your capability and risk profile. Fixed income bonds or mutual funds are good instruments to earn regular returns. For information, as of end March 2020, the yield on Indonesia's 10-year bonds was approximately 8%. On the other hand, stock mutual funds are suitable for those who want high potential investment growth.

Disclaimer:
The information contained in this FAQ should not be used as basis/benchmark for the Customer in conducting investment transactions at Bank Danamon. In the event that the Customer makes an important decision related to his/her personal investment plan, the Customer must refer to other relevant information in connection with the corresponding investment plan.