The coronavirus pandemic has brought a negative effect not only to the global economy but also to the stock market. Yet, according to a survey held by McKinsey, economic and corporate outlooks have remained more optimistic than negative as the result shows that the majority of respondents anticipate a rise in the global growth rate over the next six months.
The Big Picture — Indonesia Economy is Recovering
In analyzing economy for investing, we use an approach known as the top-down analysis. The top-down approach focuses on the big picture, or how the overall economy, down to each industrial sectors and, ultimately, the stock price of each companies.
Commonly, investors will try to identify which economic cycle a country is going through as it would give them an edge in managing their portfolio in order to obtain the highest chance of profit. This can be done by measuring the GDP growth rate of a country. There are four stages in the economic cycle: expansion/boom, peak, contraction/recession, and trough.
If you’re unfamiliar with the concept, you can read in details the economic cycle here. For this article, I’m just going to focus on discussing the recovery stage of the economic cycle.
As shown in the graph on Figure 1, the economic cycle recovery stage marks the beginning of the economy’s improvement. Economic activity is beginning to pick up. Investment, employment, confidence, spending, and prices are starting to increase. This occurs as low prices help to fuel higher levels of demand, and production and employment levels are beginning to rise at the same time. At this moment, lending is also increasing, further contributing to economic revitalization.
“Recovery story is equity friendly”, is a famous saying among investors. As I mentioned before, the increase in spending and prices means that businesses will secure higher earning. Not to mention that it means that credit risk will relatively be lower as the economy begins to recover. All this being said, investors tends to shift their investment portfolio to stocks, hence the saying “Recovery story is equity friendly”.
Figure 2 shows Indonesia’s GDP growth in the last few quarter. Real GDP declined by 5.32% in Q2 2020 after growing by 2.97% in Q1 2020 as the effects of the coronavirus pandemic undermined both domestic and external demands indicator. During Q3 2020, as consumptions starting to picked up, though it’s still recorded as a 3.49% decline, it’s still an improvement compared to the previous quarter and a good sign that the economy begin to recover.
After a massive dip in the stock market in Q1 2020, the index price slowly begins to pick up. A notable increase in transaction volume from Q3 2020, which also leads to the increase of index price, also shows that confidence among investors that the economy is recovering.
All in all, as Indonesia’s economy is recovering from the coronavirus pandemic, I believe that it’s the right time to shift our portfolio from a safer, low return investment to a relatively riskier, but more profitable stocks. Moreover, if we can identify which industries/sectors and companies that have a good prospects for the periods to come, I’m convinced that we will secure our desirable return on our investments in the stock market.