Strategy: Fuel subsidy has to go - Mandiri Sekuritas

Pressured by persistent high inflation and escalating commodity prices, BI has taken its first 25bps increase in their reference rate to 6.75%. Although the JCI has tendency to fall when rates are rising, an exception took place in 2005. But that was after BI raised rates and government increased fuel price in October. In January 2010, domestic-demand driven sectors such as consumers (JAKCONS) and trade services (JAKTRAD) outperformed the market, a sign that investors were not worried about the sound fundamentals of the domestic economy. We are continuing our recommendation to overweight on commodities (coal rather than palm oil), neutral on financials and consumers, underweight on property and cement.

The first 25bps hike for the year. Inflation registered at 0.89% mom in Jan 11 or 7.02% yoy, higher than our and consensus estimates of 0.57% mom and 0.71% mom respectively. Rising prices of raw food components remained as the culprit for the headline inflation last month, while core inflation was stable at 4.18% yoy. There were indications of wage-increase induced inflation (i.e. housing rental, maid wages, and doctor fee) that potentially drive demand.  With  FAO Food Price Index up by 3.4% in January,  its highest level since they started the measuremen t in 199 0,  BI seemed not to have any choice but to raise its rate to 6.75%.

Record high export in December 10. Indonesia total exports broke another record high reaching US$16.8bn (25.7% yoy) in Dec10, as commodity price continued to surge. Imports hovered around US$13.1bn, resulting in hefty trade surplus of US$3.7bn, jumped from US$2.1bn month earlier. Overall, Indonesia’s trade surplus rose to US$22.1bn in 2010 from US$19.7bn in 2009. The figure lends support for strong domestic-demand theme.

Putting of infrastructure story. With SBY popularity sliding (based on Kompas polling), it is difficult to see him taking ‘non-popular’ policies, for example when it comes to land acquisitions, a major  hindrance for the progress in infrastructure projects. We stick to global theme of improved economic outlook, hence commodity. Despite possible erosion in purchasing power coming from higher prices of basic goods and the reduction of fuel subsidy, industry leaders such as Indofood, and Gudang Garam, will emerge as winners. We believe the victims of rising commodity prices will be mid-sized companies who are unable to come up with additional working capitals and maintaining their inventories.