IDX, the concern of investors’ perception
http://www.thejakartapost.com/news/2009/05/20/idx-concern-investors039-perception.html
Totok Sugiharto | Wed, 05/20/2009 1:36 PM | Supplement
When the modern portfolio theory was popularized by Nobel Prize winner in economics Harry Markowitz, the academic society developed the concept of an efficient capital market (ECM). According to ECM, a market is categorized as efficient if all necessary information is reflected in the value of a particular equity share. Since the 1970s, ECM has been well supported by numerous professors.
So far, research in the capital market has proven that it is very difficult to predict how stocks with identical estimated levels of market risk should trade at prices that imply identical expected rates of return. It is impossible then to predict the movement of equity shares value as hypothesized by ECM, giving a situation called “random walk phenomena”. This in turn will negate all efforts to predict equity shares movement. The ECM, also capital assets pricing model (CAPM), courtesy of William Sharpe, is still controversial even for established markets.
The reliability of both theories becomes more uncertain when applied on emerging markets such as the Indonesian Stock Exchange (IDX). Due to this, the fundamental and external factors ought to be linked to investors’ perceptions; this is consistent with the theory of behavioral economics as created by Daniel Kahneman, 2002 Noble Prize winner for economics. Much research has been conducted in this area to connect the inter-relationships among those theories.
Investor perception can be represented by the fundamental factors of a company and the macro economic situation, including the external risks within the industry. Research by Inanga, Sembel and Sugiharto (2007) on 100 investors who invested in LQ45 companies found there is an inter-relationship among the external risks perceptions, fundamental factors and equity shares value (EV) of LQ45.
How do investors scrutinize the inter-relationships among them to predict the movement of equity shares? In both established and emerging markets, investors need certain metrics to valuate equity shares. Such a metric must be closely related to the fundamental factors (EM) and corrected by social, political, economic, regulatory, technology, environmental and legal (SPERTEL) risks. By using the metric, investors can understand more clearly the inter-relationships among the EV, fundamental factors and external risks.
Investment in equity shares, investors perceptions
Investors who were asked why they choose LQ45 as their key portfolio gave the following scaling priorities from least priority (1) to highest priority (6). The results show that the majority gave future value of equity shares the “highest priority” (500), short-term gains were given “high priority” (419), market capitalization “mid priority” (416), followed by dividend yield (325), stability in equity share prices (263) and liquidity (178).
Why they choose the future value of equity shares as their key motivation in investing in LQ45 is closely related to external risks and fundamental factors of which are inter-related or capable of influencing the value of equity shares. In relation to the fundamental factors, investigation into such relationships is known as metric analysis. IDX investors would determine the required critical metric as the first step, and then use the chosen metric as a basic analysis of the inter-relationships among them.
Investors’ choice on metric in investing in LQ45 companies
There are several well-known metrics that are used to assess the value of equity shares. By using the score-based method, the Price Earning Ratio (PER) has proven to be the most popular tool, followed by MVIC/EBITDA (EM), MVIC/Free Cash Flow, Price/Book Value, Dividend Ratio, MVIC/Book Value, MVIC/revenue and Price/Sales.
EM has been indicated as the second most closely watched metric. The question is whether such a metric can be a useful tool of analysis to predict the equity shares value. Aside from a company’s fundamental factors, the theory of valuation dictates that external risks also influence its equity shares value. This leads to the proposition of which SPERTEL risks contribute significantly to the EM and EV of LQ45.
SPERTEL effect on the EM and EV
Results from a survey of investors’ perceptions on SPERTEL risks that significantly influence the EM and equity shares value of LQ45 is further categorized into a scoring scale. The economic risks are considered the highest priority (97 percent), followed by political (94 percent), legal (85 percent), regulatory (82 percent), social (63 percent), technological (44 percent) and environmental (34 percent).
The sub-economic factors of great significance are: inflation (94 percent), fuel hike (94 percent), currency exchange (90 percent) and business cycle (81 percent). The sub-political factors that have great influence over political risk are: government political intervention (90 percent), bad governance (87 percent) and success or failure of both presidential and legislative elections (77 percent).
Then the influence of EM is investigated, particularly its relationship with the equity shares value, aside from the equity shares value that is directly influenced by the SPERTEL. By measuring the degree of inter-relationship among those variables linked to the expected future value of equity shares, investors could then know the growth level of their investment. Even this approach is still overly idealistic, taking into account that the IDX is classified as an emerging market; however, we are optimistic that this is such a huge opportunity, especially when IDX has been under the spotlight of global investors in 2009!
Aside from using Fama’s ECM, Sharpe’s CAPM and Kahneman’s behavioral economics, the result will pave the way to new horizons in expanding the understanding in the behavior of dynamic movement of equity shares price. This may increase the quality of investment in predicting the movement of equity shares price.
Findings
The inter-relationship among SPERTEL-EM-EV is divided into three sub-models, which are SPERTEL-EV, SPERTEL-EM and EM-EV. Findings on the SPERTEL-EV model indicate that around 21 percent of the movement of equity shares value of LQ45 is driven by SPERTEL. Findings on the SPERTEL-EM model indicate that around 14 percent of the EM of LQ45 is driven by SPERTEL. Finally, findings on the EM-EV model indicate that around 52 percent of the movement of equity shares value of LQ45 is driven by SPERTEL through EM.
The aforesaid results are the evidence that can support investors to improve the quality of decision in investing in equity shares. This leads to the conclusion that equity shares value is greatly influenced by external risks.
Presently, political and economic factors are most important in influencing investors’ perception of the investment in equity shares at IDX. Future value of equity shares has been seen to play a key role in motivating investors’ decisions on investing at IDX.
The writer is a lecturer at Pelita Harapan Graduate School and author of Equity Share Valuation in the Indonesian Emerging Capital Market. Website: www.totoksugiharto.com