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Since the US government is heavily on debt and they keep printing money, the market is filled with USD. With the economy condition still crawling to recover, the investors try to search an alternative place to invest their USD.

Euro is not a good choice with their debt trouble. China and India is perceieved to be already expensive. The last choice is to enter the emerging market. And there is Indonesia. Foreign fund start to inject the market. They enter the government bond market which pressing the yield to 8.99% (tenor:10 yrs). And they enter the stock market which led the rally on blue chips stocks. Better worry for the bubble, because “easy come easy go”.

We try to look at JCI, LQ45, and JII:

Standard Deviation

From the graph above, we could see that from 2004 to 2008, the three indices have an upward standard deviation then it start to down in 2009 and 2010. LQ45 is having the highest volatility followed by JII and JCI. From here we know that the 45 most liquid stocks (blue chips) are having high volatility (means high risk). And that’s also explain why JII has a high volatility (it’s because 93% of JII’s stocks are included in LQ45).

If we classified the stocks based on their sector, we can have this composition:

Sectoral Percentage

JCI stocks are dominated by 33% manufacture companies, followed by Trade, Service & Investment, and Finance. Meanwhile LQ45 stocks are dominated by 24% mining companies, followed by Manufacture, and Infrastructure. And for JII, 30% of JII’s stocks are mining companies.

Since we know the Beta for each sector, then we can multiply the above data with the correspond Beta to come up with following table:

Sectoral Beta

Among the three indices, JCI has the lowest beta. This is explained by the stocks composition in JCI which contains 79% of companies with Beta 1. This is also explaining why LQ45 and JII have a higher volatility than JCI.

But why does LQ45 has a higher volatility compared to JII even though it has a lower Beta? This is answered by the total stocks number. LQ45 has more liquid stocks than JII which made LQ45 could have a more transaction volume. Plus 69% of LQ45 stocks are listed in Margin trading stocks (compared to JII which only 63% is available for Margin transaction). This Margin stocks could double the transaction volume thus lead a higher volatility.

To sum it all up, the stocks volatility doesn’t have a strong relationship with time (from historical data) but it has a better relationship with transaction volume (liquidity). This volatility then is enhanced with the stocks’ Beta.

This is also giving us information that the Blue Chip stocks as it represented in LQ45 and JII is the best approach for “market”. Theoretically, “market” is always has Beta = 1. In other words, when we talk about “market” implicitly we talk about Blue Chip stocks.

The fact is from 2001 – 2009, Syaria equity investment (which we use Jakarta Islamic Index/JII as proxy) 70% gave outperform return compared to the conventional one (Jakarta Composite Index/JCI). Only in 2004 and 2008 the JCI outperform JII. From the return point of view, JII seems attractive than JCI.

Annual Return

But how about the risk?

Annualized Std. Deviation

The daily return standard deviation (which is the return volatility) of JII is higher than JCI. This gave JII a double edge sword. When the market is bullish, JII tend to outperform JCI and when the market is bearish JII may fell bellow JCI.

Then we need to compute the risk adjusted return (RAR) to see if the risk in JII is worth taking or not. By dividing the annual return to the annual standard deviation, we came to a ratio that gives the information on how much return we get for each 1% risk we bear.

Risk Adjusted Return

From the data we have result that JII doesn’t have a good ratio compared to JCI. It’s only in 2001 and 2007 JII has the greater RAR compared to JCI. So what’s our conclusion?

Theoretically, the stocks in JII (which Syaria comply stocks) should have a better fundamental performance. This is due to the tight screening for one stock to be able to be classified as a Syaria comply stock. A stock is considered a Syaria comply when the interest bearing to total equity ratio is not greater than 82% and the interest revenue combined with other non-halal revenue is not greater than 10% of total revenue.

But still how can we judge the above data? A further comprehensive analysis need to be conducted.

One thing for sure, capital market is a supply – demand mechanism and many people trade based on rumors. If the fundamental theory is hold, when the JCI outperform JII, there’s an indication of bubble and abnormal trading activity. This can be seen on 2004 where JCI outperform JII, soon the next year (2005) the market move flat and consolidate until 2006. And 2008 is an exceptionally case where there’s a global capital market shock. What about 2010? From the data up to 19 March 2010, JCI has already outperformed JII about 3.33%. Is it a sign of bubble and abnormality trade? I think we can only guesstimate it.

P.S
Damn! Why I keep writing this!??