Strategy:Strong economy for now - Mandiri

From the top 5 recommendations in our March 2010 monthly picks, 4 made it to the top 10 performers from 40 companies with the biggest market capitalizations. This happened as our argument on government indecisiveness in phasing out retail fuel subsidy started to make way in news headlines. We grew cautious on the market as the JCI has reached its highest levels in USD term ever. With no positive domestic issues to support, the JCI will depend on regional or global sentiments. We still like companies that will gain from domestic demand, especially the benefactors of the rupiah’s appreciation.

Domestic-demand sectors rule. The JCI was flat with downward 0.7% bias qoq in the 1Q11. However the flat performance masked a significantly varied performance among sectors. Despite strong commodity prices globally, commodity sector underperformed our expectation. Individual issues especially below- expectation-FY10 results booked by coal companies such as Indika, Adaro, and lack of volume growth in Astra Agro Lestari, hampered performance of the sectors. From the top 10 outperformers from the 40 biggest market cap, 4 are banks, 4 consumers companies, and 2 are cement companies.

Deflation in March. Consumer price index declined 0.32% mom in Mar11 or increased 6.65% yoy, on lower food prices and the local currency's appreciation, deeper than what we and consensus have expected of 0.07% mom and 0.02% deflation respectively. Yet, core inflation continued to increase to 4.45% yoy in Mar11 vs. 4.36% yoy in the previous month. Feb trade data confirmed our economist’s view that the rupiah's appreciation (1.9% year-to-Feb) to the current level may have limited impact on Indonesia’s exports, since they are dominated by raw commodities. Despite fewer working days in Feb11, exports grew by 28.9% yoy (US$14.4bn), while import growth slowed to 26.3% (US$12.0bn). Thus trade surplus rose to US$2.4bn in Feb11 from US$2.0bn in the previous month.

Maintain index target of 4,160. We still hold to our JCI target which trades at FY11F 15.0x PE. However, for the short term, we are cautious on potential liquidity withdrawal from overseas. The Government’s economic stimulus by keeping fuel subsidies will keep domestic purchasing power firm although it could add to inflationary pressures in the future.