Bear market may last

Chaiyaporn Nompitakcharoen, head of research at Bualuang Securities, said the government and the central bank have been working at cross-purposes.

While the Bank of Thailand has tried to use monetary policy to stomp out inflation, the government has tried to fire up the economy by intervening in oil refining, utility and mass transit costs, he said.

The government's policy to keep interest rates at a low level will not help reduce inflation. In contrast, the government's recent stimulus measures may reduce inflation in the short run only to have it bounce back much higher in the future. The economy will finally stall, as the high prices will shock consumers.

The central bank will likely raise its policy rate by 125 more basis points over the next 12 months, as it expects inflation to peak at above 10 per cent from next month to September, he said. For the whole year inflation is expected to average 6.5-7 per cent.

KGI Securities (Thailand) also believes that the consumer price index will peak next month at 10 per cent before easing to 9.3 per cent by the end of the year. This assumes no fuel excise-tax cut. But KGI is less pessimistic on inflation than Bualuang.

"We're getting less concerned about Thai inflation after global oil prices continued to edge down," KGI said.

Apart from the correction in the headline reference price, the cut in fuel taxes that took effect on Friday should further pull down the local petrol price.

"For the excise tax cut, we assume the local petrol price will fall 4.2 per cent in August - based on a 6-per-cent headline fall in diesel and gasohol and another assumption that those fuels account for 70 per cent of fuel consumption. In the latter case inflation may peak at 9.3 per cent," KGI said.

KGI Securities said it likes big banks like Bangkok Bank, Kasikornbank, Siam Commercial Bank and Bank of Ayudhya. It would also trade into the listed property counters that have strong second-quarter outlooks like Asian Property, Quality Houses and Preuksa Real Estate.

SCB Securities also maintains "overweight" on Thai stocks, with Kasikornbank and Bangkok Bank as top picks.

"We believe the downside risk is overly discounted in current share prices. Banks are trading at a cheap valuation relative to the stress test, historical valuation at the bottom of five-year valuation and regional peer valuations relative to Singapore, China and Hong Kong," SCB Securities said.

However, it cut its target price for most banks to factor in the lower price-to-book value target with 1 percentage point added for market risk premium and reduction of 2009 earnings.

However, Chaiyaporn predicts that stock analysts will revise down their earnings growth and SET index forecasts in the second quarter.

Bualuang Securities has lowered its SET Index target this year from 980 to 918 and may have to downgrade its forecast again, while corporate earnings growth has been cut from 15 per cent to 11.5 per cent this year.

The SET is expected to fall into a bear market for more than four months before shifting into a trading market, Chaiyaporn added.