US dollar will reach Bt31.80 by end-2010

The lingering depreciation trend of the US dollar will present investment opportunities in gold and equities, but inflationary pressure is the price that must be paid, and it may compel the US Federal Reserve to jack up its now rock-bottom overnight rates.

Kobsidthi Silpachai, head of market and economic research in the Capital Markets Business Division of Kasikornbank (KBank), said the greenback's weakness would continue, given rising federal debts, the relatively high unemployment rate, the fragile state of the US financial system and the dollar carry trade.

Damage inflicted on US financial institutions has been estimated at more than US$1 trillion (Bt33.39 trillion), but they have collectively mobilised funds of only $750 billion, indicating not all the damage has been cleared yet and that the financial position of these institutions remains fragile, he said.

Economists expect the federal debts of the United States - its current-account and budget deficits - to jump from 70 per cent of gross domestic product to 100 per cent over the next two years.

Kobsidthi forecast the US dollar would weaken to Bt32.70 this December, Bt32.50 next June and Bt31.80 in December 2010.

Kritcharat Hirunyasiri, president of MTS Gold and deputy secretary of the Gold Traders Association of Thailand, said gold had a perfectly negative correlation to the dollar and that the currency's weakness would boost investment demand in gold.

"Gold could be an investment instrument until next year, and it's possible the gold price will reach $1,200 to $2,000 an ounce next year as the US dollar weakens further," he said.

"Gold now seems to be a currency, and investors are using it to hedge against inflation and currency risks. Investment demand in gold has risen considerably, as seen by the fact the SPDR Gold Trust - the world's largest gold-backed exchange-traded fund - recently reported it held 1,109 tonnes of gold bullion."

KBank's Kobsidthi said if China wanted to boost its yuan to an international reserve currency, then its central bank would have to accumulate additional gold.

"If the majority of the Chinese central bank's international reserves remain in dollars and euros, many people may suggest the yuan's liquidity is less than that of the dollar and the euro," he said.

Kritcharat said that as of March 31, China's central bank held 3,000 tonnes of gold bullion in its portfolio and that he believed it had piled it up over six or seven months.

There was "vast room" for the Chinese central bank to accumulate gold, he said.

Thanachart Securities senior vice president Pichai Lertsupongkit said the euphoric momentum in Thai shares would continue, thanks mainly to capital inflows and earnings momentum.

Governments around the world have injected hefty amounts of money [into the financial system], and while the use rate is relatively low, liquidity is excessive and being used to speculate in world stock markets, he said.

Thai listed companies' earnings will grow about 19 per cent this year and 20 per cent next year, and this will cause a low valuation in the Thai stock market's laggard price-to-earnings ratio next year, less than 12.

"As we have a local political problem, our share prices have been discounted 15-20 per cent from other stock markets, with the discount sometimes reaching 30 per cent. If political uncertainty is eliminated and we can tell foreign investors what our key economic drivers will be over the next five years, it's possible the Thai stock market will reach 800 or even 900 points," Pichai said.

He said his brokerage house estimated the Stock Exchange of Thailand (SET) Index would hit 820 points next year. Even though the Thai stock market has surged 60 per cent so far this year, there remain many stocks with cheap valuation. The market prices of PTT, PTT Exploration and Production and Banpu still offer 20-per-cent upside gains from fair values, while large-bank stocks are traded at 20-per-cent below their price-to-book value.

Pichai did not rule out the possibility the SET Index might plunge to below 700 points again this year, saying: "The dust has not yet settled."

Citibank retail-banking director Pavin Rodloytuk said the Thai stock market might surge to 950 points in the next three years.

"As long as the economy has not recovered fully, the central bank will have to keep the [policy interest] rate low, so dividend yields and capital gains in the stock market will remain attractive. The steep fall in the stock market presents an investment opportunity," he said.

Pavin said emerging markets, particularly in Asia, would become interesting places, because they would lead the economic recovery, while the US would remain an interesting market because of attractive asset prices.

Thai Bond Market Association executive vice president Ariya Tiranaprakij said the weakness of the dollar would lead the US to risk inflationary pressures, at which point the Fed might reverse its interest-rate trend.

She predicted the Thai interest rate would rise in the second half of next year at the earliest, because the Finance Ministry's bond issue and borrowing plan to finance its 2010 budget deficit and the Thai Khemkhaeng project would not completely drain surplus liquidity from the financial system.

Moreover, large and medium-sized corporations have high amounts of cash in hand following debenture issues this year, and there is no need for new investment, because of a low use rate of 60 per cent. Therefore, they will be in no hurry to secure loans from banks, and the liquidity will not be absorbed.

When interest rates tend to rise in next year's second half, retail investors should invest in short-term bonds, in order to prevent lost opportunities, she said.