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Charter court verdict will set the stage for two scenarios

Some time over the next month the Constitutional Court will decide whether Prime Minister Yingluck Shinawatra acted unconstitutionally when she removed the National Security Council chief from his post several years ago. If the court finds against her, she will not be able to remain as caretaker PM. But whether Yingluck is in or out is less important than what happens to her caretaker Cabinet.

We see two potential outcomes, one of which is "market neutral" and the other "market negative". That's why it is likely the Stock Exchange of Thailand will trade flat to down in the coming months.

Scenario No 1: The Cabinet is allowed to stay in place. Even if Yingluck goes, this is likely to be a "market neutral" outcome. Basically, it largely keeps the status quo (Pheu Thai Party in charge) and wouldn't necessarily bring out the red shirts.

Scenario No 2: Both the Cabinet and Yingluck are removed. This scenario would create a major political vacuum and would clearly be "market negative" in the short term. The anti-government movement led by Suthep Thaugsuban would jump at the opportunity to ask for a new (unelected) prime minister. How would the appointment of the new PM and Cabinet happen? How long would they be in control? How would the red shirts respond? There are a lot of questions but no easy answers - and such uncertainty would be bad for the market.

What's the risk to this near-term "flat to down" call on the SET? A dramatic reconciliation between the political parties would allow for new elections to take place with broad political representation. But the events of the past few months suggest that this is very unlikely. Still, any move towards political stability (regardless of who is in charge) would be very good for the market longer-term.

Stock selection remains crucial during the current bout of political uncertainty and we advise investors to adopt a cautious strategy and accumulate quality big-cap names during market weakness.

Among our big-cap picks are BBL (Bangkok Bank), ADVANC (Advanced Info Service), PTTEP (PTT Exploration and Production), CPALL and CPN (Central Pattana). We also like selective mid-cap stocks including BCP (Bangchak Petroleum), IVL (Indorama Ventures), HEMRAJ (Hemaraj Land and Development), QH (Quality Houses) and SPALI (Supalai).


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