Bears likely to stay a while but olympics might provide boost

Head of Research, Bualuang Securities

The SET Index remained in a bearish mode after the inflation rate in June reached a 10-year high.

The market was not very surprised about the headline figure but was scared by the 3.6-per-cent rise in core inflation, above the Bank of Thailand's target this year.

Controversy about the direction of monetary policy is the talk of the town, but bond investors who are so keen on debt instruments obviously believe the BOT will certainly raise its tightening stance sooner or later.

West Texas Intermediate crude oil prices continue to break new highs to nearly US$150 (Bt5,025) a barrel as Thailand looks ever more vulnerable.

Under tough economic conditions ahead, I believe we will have a bear market for longer than we experienced in 2004 to 2006.

The loan-growth outlook for banks for the next six to 12 months apparently looks weaker and weaker as the market is focusing on non-performing loans. That's why bargain-hunting for bank stocks for good second-quarter results looks very weak.

Our stock picks are PTT Exploration and Production, Banpu, Siam Gas and Petrochemicals, Bunrungrad Hospital and Thai Tap Water Supply.

Tisco Securities

In line with other regional markets, the SET continued heading south during the review period, culminating in a 2.3-per-cent drop to 742 points on Thursday. This marked the SET's lowest closing level since late January and once again surging oil prices were the cause. With the benchmark crude price at around $145 per barrel, the spectre of global inflation looms large and the US economy is looking increasingly troubled. Not surprisingly sentiment on equity markets worldwide has turned distinctly bearish.

Nonetheless, an easing of political tension and some favourable economic numbers are encouraging signs for the Thai market. The prolonged protest by the People's Alliance for Democracy aimed at forcing the government to step down appears to be losing steam. A court order that the rally outside Government House be abandoned is likely to lead to a change of tactics by the protesters. In addition the current account returned to a surplus in May and the manufacturing production index continued its upward momentum.

In our view the market is close to finding its bottom, though a number of obstacles stand in the way of a sustainable rebound. Chief among these is a continuing build-up in global inflationary pressure, leading to slower economic growth and a higher incidence of negative real interest rates.

An extended period of political instability could choke off foreign direct investment inflows and the baht remains under pressure. But looking beyond these concerns, we expect strong earnings growth to continue in the second quarter and for headline inflation to peak in July or August at around 9.5-9.9 per cent. With the market now approaching the oversold level, we believe more buying opportunities will be perceived in the third quarter and that sentiment will turn.

Vajiralux Sanglerdsillapachai

Executive Director, Trinity Securities

 Thailand's 8.9-per-cent headline inflation in June has shocked the market. Oil prices of almost $150 per barrel will absolutely hurt the global economy. We foresee the reference interest rate to rise by 25 basis points to 3.5 per cent at the next meeting of the Monetary Policy Committee on July 16.

We still believe that oil prices are the origin of the problem and should unwind first. We expect oil to reach $150 a barrel and then decline to $120-S130 due to additional supplies from the exploration of new wells in the Middle East and the global economic recession.

Political events in court are also are a hot issue for investors.

We recommend a gradually increase in weighting stocks in the SET, waiting for global indexes to rebound, and monitoring our political situation. The SET might become more bullish when public companies announce their second-quarter earnings.

We believe the banking sector will still show strong earnings, while the energy sector - especially exploration and production companies like PTT Exploration and Production (PTTEP) - will show its strongest performance due to the jump in oil prices and its own production. Thai Oil is another company that might show huge earnings of about Bt10 billion due to stock gains and a high gross refining margin for diesel and jet fuel.

Land developers might show good earnings, in spite of the bear economy, due to the transfer delay of housing units from the first to the second quarter.

We choose Quality Houses and Preuksa Real Estate as our top picks in the property sector.

We still believe the real bottom of the SET might appear by the end of this month. It might lead the market to recover by August, helped by the Olympics.

We recommend Quality Houses, Preuksa, Hana Microelectronic, PTTEP, Thai Oil, and Thai Plastic and Chemicals for trading during the bear market.