Inflation puts damper on positive factors

The Thai stock market struggled to break through strong psychological resistance at 850 points. According to the Finance Ministry, the gross domestic product in the first quarter this year will likely grow by 6 per cent over the same period last year.

Good news, isn't it? But the bad news is that the inflation rate continues to rise at a high speed and has already hit 6 per cent in the latest month.

Our economist predicts inflationary pressure will persist until the third quarter this year, which reduces the probability of a policy rate cut by the Bank of Thailand for the time remaining this year. Looking forward, inflation hedging and the US dollar recovery should be key themes for the market.

Therefore, I prefer PTT Exploration and Production, Banpu, Lam Soon (Thailand) and Thai Vegetable as inflation-hedged stocks and Cal-Comp Electronics and Delta Electronics (Thailand) as proxies of US dollar recovery.

TISCO Securities

Bank of Thailand data showing significant growth in domestic demand in the first quarter and a strong upturn in agricultural exports support our bullish view on Thai equities. However, we have raised our headline inflation forecast in 2008 from 4.3 per cent to 5 per cent due to the sharp rise in oil and food prices. Other factors that could feed into inflation are a 5-per-cent rise in the minimum wage effective next month and a tentative 13-per-cent increase in transport fees.

The upsurge in US oil prices to  record highs of more than US$120 (Bt3,840) per barrel should stimulate further buying in big-cap energy stocks. Note that this sector now accounts for 35 per cent of market capitalisation following the SET listing of Esso on May 6. Refinery stocks could suffer short-term weakness, however, after a fall in Singapore refining margins to $3 per barrel.

One encouraging sign for the SET is that foreign investors were net buyers of Bt2.6 billion of Thai stocks in the first week of May after being net sellers of Bt65 million in April and Bt10 billion in March. Sentiment has also been lifted by better than expected 1Q08 results from major companies: Siam Cement, Siam City Cement, Sahaviriya Steel Industries, PTT Chemical and Total Access Communication. We expect overall first-quarter earnings should increase by 11-13 per cent year on year, with earnings growth even stronger in the following quarters at 20-40 per cent year on year. Stock-market momentum should also be supported by the SET's cheap valuation vs regional peers, Thailand's economic recovery and rising bond yields.

Vajiralux Sanglerdsillapachai

Executive Director,

Trinity Securities

After its first-quarter performance announcement, the SET is expected to take profit. Bigcap companies in refining and petrochemicals have shown unimpressive earnings, for instance, Thai Oil and PTT Aromatics and Refining, while PTT Exploration and Production (PTTEP) had

a much better performance but still slightly lower than our expectations.

We recommend to take profit in the short term. The baht depreciated 0.8 per cent month to date, and we expect it will be weaker over Bt32 to the dollar by the end of next week. There is likely to be a fund outflow to the yen currency after taking profit from emerging markets and parking money in main currencies except the US dollar.

Fears of an oil-price peak are expected to make investors take profit in upstream energy stocks that are the most favoured during a time of oil-price hikes, including PTTEP and PTT.

On the other hand, some investors might sell out the stocks that received an impact from the oil surge and significant high inflation, including the banking, property and construction sectors.

There is likely to be only small room to escape for the SET in the next week, therefore we use the selective "buy" strategy.

Our weekly favourite stocks are Banpu, Tata Steel (Thailand), Thoresen Thai Agencies, Dusit Medical Services and Delta Electronics.