Warning bond yields could scupper stock-market gains

The 10-year bond yield now stands at 3.5 per cent, a level that many investors consider unattractive, which is why they mayswitch from bonds to stock markets.

One thing the Federal Reserve has done to solve the US economic turmoil is by US Treasury and other bonds to pump money into the financial system - in effect, printing money - which will bring inflationary pressure in the coming years, Supavud said. He was speaking yesterday at a seminar entitled "Economic Autopsy and Stock-market Direction in the Second Half".

The Fed has already spent US$180 billion (Bt6.1 trillion) on these bonds, from a target of $300 billion.

Bond-market movements generally have a negative correlation with those of stock markets, and Wall Street has an 80-per-cent positive correlation with the Thai stock market, Supavud said.

The Thai stock market has risen 32 per cent so far this year.

Moreover, the market has a correlation with oil prices, the US dollar and other Asian stock markets, he said.

Supavud said Phatra Securities had maintained its SET index target at 600 points, equivalent to a price-to-equity ratio of 10.

It is difficult to predict the Thai stock market, which has already priced in positive news from the second half of this year, he said.

To diversify risk, investors should allocate their investment portfolios to several countries, as Thailand has high political risk.

Kongkiat Opaswongkarn, CEO of Asia Plus Securities, said the stock market's cycle had shortened due to a spate of factors, as seen by wild swings in the Thai stock market.

All asset classes - including bond-soft commodities, oil and currency fluctuations impact the equity market, he said.

A "dollar-cost average" is the best investment method during economic recession, Kongkiat said.

He estimated that the SET index would hover around 550-600 points.

Even though several big market-cap stocks are overvalued, he said that more than 100 stocks were still cheap.

Paiboon Nalinthrangkurn, CEO of Tisco Securities, said: "I'm concerned about the stock market in the third quarter, as a consolidation might be seen if the world economy is really recovering. The Fed might slow down money injection and trigger an upward interest-rate trend. Moreover, the stock market will make a correction if the economy does not recover as expected."