Global financial markets are bracing for a major sell-off in the next few weeks as the euro zone crisis grows more severe, and emerging markets will likely be hit hard, analysts and market watchers say.
Stocks in Asia, including in Indonesia, have been hammered in the past few weeks as the European crisis deepens, US economic indicators worsen and China’s economic growth shows signs of slowing.
Confidence has ebbed and fears have grown that the global economy could face a situation similar to that of 2008, when markets went into a free fall.
The Jakarta Composite Index has already shed 12 percent from its 4,224 record high on May 3, to trade at 3,717.88 on Tuesday. Across the year so far, the market has fallen 2.7 percent, making it the biggest decliner among its peers.
The LQ45, an index consisting of the 45 biggest listed corporations in Indonesia, has lost 6.7 percent so far this year, outpacing the decline of the main index.
Astra International, the biggest corporation in Indonesia, had lost 17 percent this year as of Monday, but rebounded on Tuesday as it applied its 10-for-1 stock split.
Bank Mandiri, the country’s largest lender by assets, and Aneka Tambang (Antam), the state gold and nickel producer, are also included in the LQ45 index. Antam lost 29 percent to trade at Rp 1,150 and Bank Mandiri lost 1.5 percent to close at Rp 6,650 on Tuesday.
“The hope for a decoupling of any continent of the world from what is currently threatening the global upswing is probably wishful thinking,” Burkhard Varnholt, the chief investment officer at Zurich-based Bank Sarasin, which manages about $100 billion in assets globally, said in Jakarta on Tuesday.
Varnholt said economic cycles around the world have become more synchronized as globalization proceeds, a notion echoed by other analysts.
“Despite good economic conditions in Indonesia, what determines the market now is external factors,” said Janson Nasrial, a market strategist with AmCapital in Jakarta. Janson did not believe the gains made in Indonesia on Tuesday — of 1.7 percent — would be sustainable.
“It was only a technical rebound,” he said. “There has been no improvement in the fundamental story globally. The index can be corrected again on Wednesday.”
Among the hardest hit has been the mining sector, which accounts for 9.6 percent of the Jakarta Composite Index. The sector has lost 25.3 percent so far this year as energy and metal prices have fallen sharply.
According to Janson, coal prices in Newcastle dropped from $115 per ton at the end of last year to $91 per ton this week.
Janson said increased uncertainty from recent policies in Indonesia’s mining industry have also played a part in the sharp decline in mining stocks, but the impact was “not as significant as the decline of commodity prices.”
The government plans to expand export taxes on 65 minerals, up from 14 minerals earlier. Coal, which was earlier exempted, has been added to the list, according to a report by Reuters. Authorities and industry groups quickly denied the report, but the damage was done, as the mining sector fell almost 8 percent.
Janson said the result of Greece’s elections on June 17 would be a determining factor for global markets, with much-needed positivity coming from Europe if the pro-bailout party wins.
Bank Sarasin’s Varnholt said he believed Greece would honor its contract with other euro zone countries and the International Monetary Fund.
“The euro zone will not collapse and ultimately it will integrate,” he said, adding that integration would start with banking unification, which he said was easier than political integration. He said Asian stock markets, which have fared much better than Western markets in the past decade, tended to suffer from more speculative money that came and went quickly.
Investors, he noted, should take a long-term view of Asian markets, including in Indonesia. “The economy’s underlying strength will continue to power it ahead,” he said, adding that domestic consumption would sustain growth. However, Varnholt said Indonesia’s short-term challenge would be its exposure to external funds.
Indonesia has more external debt and foreign reserves than other Asian countries, he said. He added that this exposure would affect the rupiah, which has declined 4 percent this year.