Foreign pullback to be temporary

Uncertainty in Europe, US adds to weakening of sentiment; cooling off period offers investors opportunity increase weightings in banking, energy

The market is entering a more nervous period after a strong rally over the last eight months that has taken the SET Index to 18-year highs. Foreign investors sold a net Bt8.4 billion in Thai equities on February 5-7 amid a slowdown in capital inflows due to Chinese New Year. In addition, sentiment is likely to be dampened by the re-emergence of political uncertainty in Spain and Italy, the looming US budget battle and the SET's warning of price manipulation and insider trading in certain stocks.

We believe any pullback will be temporary and offers an opportunity to increase weightings, particularly in the big cap banking, energy, petrochem and telco sectors. A key driver for Thai equities, in our view, is further foreign fund flows into Thailand's capital markets. The country's external debt at 36 per cent of gross domestic product is low and has room to expand. Meanwhile the Thai treasury-yield gap over the US remains wide and supply of capital from overseas to meet productive Thai investment demand should continue even in a Fed quantitative easing exit scenario.

We remain overweight on Thai banks and have raised our 2013-15 earnings by an average of 2 per cent after the eight banks under our coverage reported in-line profit growth of 25 per cent year on year for 2012. Resilient domestic macro conditions underpin our view that the industry's strong growth momentum will continue in 2013. Bangkok Bank is our top sector pick in the short-term and we have raised our target price by 4 per cent to Bt240 to reflect its faster return on equity growth than domestic peers. On a one-year view, we also like KTB, SCB and KBANK.

We also maintain our bullish view on the contractor sector, which got a boost last week after the Water and Flood Management Commission selected six groups of bidders for the Bt350-billion water-management project. Note that there are plenty of other public projects in the pipeline including mass-transit projects, double-track railways, the high-speed train project, the new parliament building and the expansion of Suvarnabhumi Airport. Our favourite stocks in this sector are STEC and CK.



Surachai Pramualcharoenkit

Executive director

Trinity Securities

Late last week, the euro weakened after higher average return on Spanish bonds from the last auction and Mario Draghi’s citing the appreciating euro could become a major obstacle for the euro zone's competitiveness.

We expect the euro to depreciate consistently this February after Italy's election late this month. It is possible that the new prime minister may decide not to proceed with belt-tightening as agreed by the troika. This could prompt the US dollar to continue its appreciation.

Given the likely US dollar appreciation, foreign investors who previously speculated on the baht through short-term debt instruments could take some profit. Late last week, foreign investors were net sellers of short-term debt instruments and this might indirectly cause them to net sell in the Thai stock market.

We begin to see the following signals of risks for the SET Index.

1 Net sales of foreign investors in the spot market for the third consecutive day.

2 Less than Bt10-billion purchase value (one way) of foreign investors in the spot market for the third consecutive day.

3 High net shorts of foreign investors in the futures market in February (3,100 contracts)

4 The Thai stock market's clear under-performance, compared to other TIP countries, like Indonesia and the Philippines

5 The beginning of the signal for the baht's depreciation.

Based on the above reasons, we continue to see short-term correction of the SET Index, suggesting investors lower their portfolios and slow down investment. In this period, small caps are likely to outperform big caps. Our stock picks are:

1 Monthly Top Pick - THCOM, CK, PLE, NWR, BTS, PJW, RS, FPI, PRIN, SINGER;

2 High-dividend stocks with upside and stocks with likely rise in February - SIRI, ROJNA, AP.



Chanpen Sirithanarattanakul

Head of Research, DBS Vickers Securities (Thailand)

The SET Index rose 2.63 per cent over the last two weeks to end at 1,499.81 last Thursday, breaching the 1,500 level to peak at 1,506.37 last Monday and outperforming regional peers' negative 0.6-per-cent return. The Commerce, Energy and Financial sectors were the most active.

The US reported GDP growth contracted by 0.1 per cent (quarter on quarter, seasonally adjusted annual rate) in the fourth quarter of last year, significantly below our and consensus estimates. The Fed is keeping policy on hold. The good thing is that there are signs of growth in private consumption and business investments, but the cut back on government spending will put pressure on the overall growth outlook. This could mean the central bank may keep quan-titative easing 3 rolling until things recover, and hence, the liquidity-driven market should continue to head up.

Meanwhile, the corporate sector has started to release fourth-quarter results. ADVANC's fourth quarter earnings were weaker-than-expected, with core profit up 22 per cent year on year but down 3.8 per cent quarter on quarter to Bt8.405 billion. The company raised three-year capital expenditure to Bt70 billion from Bt50 billion and reaffirmed its target for nationwide coverage by end-2013. We recommend to start accumulating now before the market starts to price up the stock to capture strong earnings growth from 2014 onwards. We are maintaining a "Buy" rating for ADVANC with a target price of Bt255.

Looking forward, more com-panies will release results in the next two weeks. We expect property stocks, especially residential property developers, to report strong year on year and quarter on quarter earnings growth driven by a large number of transfers. Despite the strong rally year to date, the sector is still attractive, trading at only 12.7 times 2013 price-earnings forecast, while offering 19 per cent earnings growth. We continue to recommend investors overweight the sector.