The Investment Strategy of Sector Rotation over Business Cycles in the Indonesia Stock Exchange to Generate Superior Return

Abstract

The investment strategy of sector rotation over business cycles is one of the investment strategies in The Indonesia Stock Exchange. The basic philosophy of the investment strategy of sector rotation is to invest assets in sectors that are expected to perform well and avoid sectors that are expected to perform otherwise. In this research, the investment strategy of sector rotation begins with the identification of the business cycle based on Indonesia’s economic growth or GDP data. The business cycle is divided into four stages referring to the movement of the GDP value, namely early contraction, late contraction, early expansion and late expansion. After the four stages of the business cycle the time period is found, the performance of stocks from each sector is calculated by the return and the amount of risk that accompanies it in the format of the average per sector, to find out which sectors have good performance at each stage of the business cycle. Sector performance is assumed to be good if the average rate of return can exceed the performance of the JCI which is used as a benchmark. After successfully identifying sectors that have good performance at each stage of the business cycle, the next step is compiling a portfolio. There are two portfolios formed, namely Portfolio A and Portfolio B. Portfolio A is composed of each sector whose performance is only if it is higher than the JCI and is selected at each stage of the business cycle. Meanwhile Portfolio B is compiled from each sector and selected at each stage of the business cycle whose performance is if and only if it is higher than the JCI and must be positive. Then the performance of the portfolio and the JCI is calculated by calculating the value of the growth rate of return by considering the risk during the period of one business cycle. The calculation results obtained are as follows: Portfolio A grew by 116.52%, Portfolio B 158.41% and JCI – 4.43%. Meanwhile, the Sharpe Ratio for Portfolio A is 2.92, Portfolio B is 4.73 and JCI is – 0.65. From these results it can be seen that the growth in the value of portfolio investment compiled from the investment strategy of sector rotation is quite larger than the growth of the JCI which is used as a benchmark, so it can be said that this strategy produces a superior return.