The SET Index has fallen a further 3.8 per cent in the last two weeks, breaking the 1,300 support level to close at 1,258.06 on Thursday. It continued to underperform regional peers as represented by the MSCI Asia ex-Japan Index, which retreated 2.6 per c
Foreign investors turned net buyers of Bt3.5 billion after selling heavily last month. Retail investors were also net buyers with a larger volume of Bt4.6 billion, while local institutions turned net sellers of Bt6.7 billion.
On the domestic front, there is still no solution to the political deadlock. The situation has escalated with the People’s Democratic Reform Committee’s Bangkok Shutdown starting today along with the red shirts’ provincial rallies.
The political developments this week will be critical in determining the direction of the market in the next few weeks.
The February 2 election is now more likely to be postponed. Last week, the Election Commission submitted a letter to caretaker Prime Minister Yingluck to defer the election, citing the possibility of violence if they proceed.
Furthermore, the new House of Representatives might not be able to convene if less than 95 per cent of the 500 MPs are present. This comes after the National Anti-Corruption Commission’s charges against 308 of 381 ex-MPs and senators earlier last week for misconduct in connection with a charter amendment.
At the macro level, the economic outlook remains dire. The Bank of Thailand might revise its 2014 GDP forecast down to below 4 per cent at the Monetary Policy Committee meeting on January 22 as it reviews the latest developments.
Meanwhile, the baht remains weak. Both external and internal factors, such as QE tapering and political uncertainty, will continue to pressure the baht, which would benefit the export sector in the medium term.
The stock market is likely to remain volatile with downward pressure. Our target 12-month SET Index is revised down to 1,455 assuming 12-per-cent EPS growth. In our strategy for 2014, we favour sectors that will be resilient to the current political turmoil. We recommend to overweight the food, electronics, telecom, transportation and petrochemical sectors.
Our stock picks include CPF, DELTA, KCE, AOT, KBANK, CPN, CPALL and PTTGC.
We believe a 5-10-per-cent upside for the SET from current levels is achievable in 2014 for an upper range of 1,300-1,350. With expected upside falling well short of most investors’ hurdle rate – as well as our own recently upwardly revised cost of equity to 12.7 per cent – plus near-term downside risks from the protests still apparent, the overall risk-reward trade-off does not strike us as particularly compelling.
Factoring in palpable economic damage from the ongoing political turmoil, Tisco’s economic team has cut its 2014 GDP growth forecast to 3.7 per cent from 4.5 per cent. It also anticipates a 25-basis-point policy rate cut at the BoT’s policy meeting on January 22.
To state the obvious, the risk of escalating protests and more violence remains the standout Thai-specific risk near term. Compounding the risk in the medium term is the realisation that the well-worn and back-tested investment rule of thumb that a politics-induced SET sell-off is a clear buy signal, seems less apt this time around.
A key difference in this cycle is that protest flashpoints have persisted over a period of months with no clear resolution in sight, while questions remain as to whether the election scheduled for February 2 will actually proceed.
The SET’s external-facing sectors probably carry less earnings downside risk than domestic plays. And with Deutsche Bank’s regional energy analyst now more upbeat on GRM prospects for 2H2014/2015, we have added TOP and BCP to our top picks list.
On the domestic front, we prefer more defensive blue chips namely BBL, ADVANC, CPALL and LH. We also include midcaps HEMRAJ and CENTEL, both clearly oversold in our view. Lastly, we acknowledge that the risk to our subdued stance on the SET may well be to the upside, in the event that political tensions ease quickly.
Prepare for the lucky 13th.
We see the best strategy for the planned big protests today as holding cash at a higher-than-normal level. We continue our focus on stocks that do not depend on local factors, like the food and agricultural group (CPF, TUF, STA), electronics group (SVI, HANA, KCE) and shipping (TTA). This is to prevent any impacts from violence that may occur.
More than that, such stocks could be held until at least the end of this month. This is to mitigate risks if the baht extends its depreciation if the MPC cuts the policy rate from 2.25 per cent or the Fed reduces its QE programme from January 28-29, as the baht will be pressured from a likely narrower yield.
The factors that need close monitoring include local political developments. In the middle of this month, the National Anti-Corruption Commission’s next move after investigating the rice pledging case should be known. If the commission files a suit, that could be an indication of wrongdoing in the next period. This will interrupt investment in the next period.
During the current market corrections, we overweight blue chips with sharp drops and attractive prices for medium- to long-term investment in the SET50. Such stocks include TCAP, BCP, SCB, GLOW, KBANK. We see them suit value investors who invest for at least three to six months. This is a good opportunity to accumulate blue chips with sound fundamentals and cheap prices. There are few chances to do this.
The SET Index is influenced mainly by local investors. We suggest following stocks that are safe from the local political developments, in the big picture analysis.
Export-oriented stocks that are influenced by the global economic recovery and the baht’s depreciation: CPF, TUF, SVI, FPI
Energy stocks with US dollar income: PTTEP
Alternative energy stocks: EA, IFEC
Transportation stocks with influence from international trade: TTA, NYT
Stocks with benefits from higher household debt: JMT