The fluctuating index of Indonesia only edged up 0.23 percent last week to reach the level of 4,937.21. Foreigners sold IDR 1.6 trillion (USD $165 million) worth of Indonesian stocks. The central bank's benchmark interest rate (BI rate) was announced to remain at 5.75 percent. Will these volatile conditions continue into this week? Yes, probably. I base my answer on the following reasons:

The PE ratio of Indonesia's composite index has now reached the level of 18.5x, a - historically - rather high level which implies less upside potential (the index PE record stands at 21x). However, the index is currently not over-valuated yet because it is still within a logical PE range.

The ongoing polemic of the possible reduction of fuel subsidies has become center of the market's attention. In general, foreign investors prefer if the government manages to reduce these subsidies and divert the funds to infrastructure development. However, an increased fuel price or restricted subsidized fuel consumption will bring more inflationary pressures. Currently, core inflation is still about 4.2 percent (YoY) but headline inflation has reached 5.9 percent (YoY) in March. Personally, I am convinced that if the price of fuel is increased or its quantity limited, the subsequent emerging inflation will only be of a temporary nature. Prices will go back to normal after a while.

Although US economic data is improving, global conditions remain uncertain. There is optimism that this year's economic growth of America will reach 2.3 percent and increases to 3.2 percent next year. However, these estimates of economic growth can only be achieved if the proposal concerning tightening budgets is approved by the Congress. Before reaching an agreement, the market will speculate. Furthermore, the crisis in Europe is still a concern. Though bond yields in some countries have fallen to record lows, the market remains quite concerned with policies of the European Union. Overall, both the World Bank and the IMF have slashed its forecast of global economic growth in the near future.

Indonesia's dividend season does indeed provide an usual fresh air for its index. But there is a potential decline in stock prices after the ex dividend season is over. This can cause the index to fluctuate this week.

In summary, Indonesia's index will remain volatile this week. I advise investors to remain disciplined and continue trading. Maintaining cash positions is also one of the recommended strategies. But do not miss the opportunity to buy stocks that will pay dividends with high yields.

David Sutyanto is a research analyst at Jakarta-based First Asia Capital