Equity Strategy:Wasted deflation - Mandiri

From the five stocks we recommended in April 4, 2011, two of them made north of 20% mom return, that was ENRG (+22.7%) and EXCL (+24.8%). The two counters are representation of what has driven Indonesian economies, oil and gas (ENRG) which benefits from global USD debasement effect, and domestic consumption EXCL (telecom). We suggest to trim down financials as we see the chance for the government to raise fuel prices during ‘deflation’ months has been squandered, hence should the government have no option but to raise fuel prices, we might see inflation momentarily spike up.

Strong economy courtesy of ballooning fuel subsidy. As of end 1Q11, Pertamina estimated consumption of subsidized fuel has reached 9.91 million kiloliters or 25.7% of the 2011 target of 38.5 million kiloliters. As following quarters will see holiday and festive seasons, very likely consumption will surpass the target as disparity between international prices and subsidized prices is widening. The window of opportunity during fuel subsidy maintenance, we believe, has been used by domestic producers to raise prices. Indofood raised its noodle prices by 8-10%, Gudang Garam has its ASP increased by 8%, while Multistrada, the tiremaker, lifted its ASP by 11%.

No more ‘deflation’ months this year. Our economist expects April to be the last ‘deflation’ month for the year. The start of new school year, Ramadhan in July, will re-ignite inflation. Consumer price fell 0.31% mom (+6.16% yoy) in April as falling raw food prices again dragged headline inflation. However the inflation measure outside volatile food and energy prices rose to 4.62% yoy from 4.28% in Dec10, getting closer to central bank’s 5% “safe level”. Trade surplus fell to US$1.8bn from US$2.4bn in Feb11. Another important trend worth noting is that the surge in total import growth was mainly driven by consumer goods imports. Total imports grew by 29.5% yoy in 1Q11, led by the 48.2% growth in consumer goods imports, followed by raw material imports of 31.3% and imported capital goods 15.8% yoy.

Rotation to commodities. Despite rising commodity prices, mining sector and agriculture sector still recorded a negative return year to date (Exhibit 2). One reason might be skepticism about sustainability of high prices. Other reasons are lower production volume (in the case of coal) and imposition of export tax (for palm oil producers). However we think this is about to change. In two cases of rising fuel price in 2005, both financials and miscellaneous (Astra International is the major component), recorded negative returns (a month after/a month before, Exhibit 3).