Mandiri Sekuritas Commentary : Raise interest rates or let currency appreciates

􀂄 In the last two days JCI has corrected 6.9% from 3.736 at Thursday (Jan 6 closing, with biggest drop registered on Monday (-4.2%). Deep correction also exhibited in Indonesian government bond which fell 6.3% since Jan 6 closing. The correction was felt especially on the long tenors, with high volume Monday indicates strong selling pressures. Total value of the transaction in the secondary bond market was reported to be Rp6.8tn. The most actively traded security was the long-end series such as the 20-yr FR52 and 21-yr FR54 which were traded at 107.75 and 100 or down by 8.7ppt and 6.4ppt respectively.

􀂄 Improvements in outlook for US economy and threat for growth in emerging market from rising inflation are seen as the reason for possible reallocation of portfolios from emerging market to developed market. With
FAO food price index rising 24.6% in 2010, and fresh food comprised 23.7% of Indonesia’s CPI basket, the threat is imminent. We think market is trying to pressure Bank Indonesia to raise its benchmark SBI rates and later on, let currency appreciates. And we think it is just a matter of time, before BI steps in and raise rates.

􀂄 We still like commodities, and the sell-off represents an opportunity. On interest-rate sensitive counters I prefer staples such as Indofood and notautomotives, or properties. One thing to note from past crises are industriestend to consolidate, as medium companies out of business due to its inability adjusting its working capital. As for banks, the biggest negative impact will be felt by their medium-sized company clients. We also grew cautious on urban people as their fixed salary will get squeeze by rising commodities and lifting on retail fuel subsidy.