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Fundamentals not liquidity to guide SET movement

Samart president Watchai Vilailuck shows a terrestrial digital TV set top box.

Samart president Watchai Vilailuck shows a terrestrial digital TV set top box.

This year, the stock market will depend more on fundamentals than on excess liquidity.

From 2009 to the second quarter of 2013, the stock market was driven by excess liquidity in the financial system after several countries adopted monetary easing to solve their economic problems.

The SET Index's price to earnings (P/E) ratio was driven up from 10 times to the peak of 18. That is above market fundamentals.

After that, heavy profit-taking came on concerns over the US reduction of quantitative easing (QE) reduction, the local political situation and the Thai economic slowdown. At the end of last year, the stock market was trading at a P/E of about 14.

During 2014, monetary easing is expected to be reduced, which will lower the money supply in the system. With the normal mechanism, capital will consistently flow out of the stock market and the SET Index will depend mainly on listed companies' fundamentals. Listed companies' earnings growth is expected at 13.26 per cent in 2014.

The following risk factors need to be closely monitored:

The local political situation seems to have intensified again from the beginning of the election process to the last week of 2013. There were clashes amid the protests that led to deaths and injuries. The election committee also proposed a postponement of the February 2 poll, as there may be a possibility of more violence. There's a high possibility of the election being postponed and the political crisis will likely drag on. The longer the election is delayed, the worse the impact on the stock market, trading sentiment and fundamentals, which could increase the risk of cutting listed companies' earnings per share (EPS) growth forecast of 13.26 per cent.

Based on information from 2010, the first quarter of every year is when listed companies report the highest performance in a year. If there is the worst impact from the political situation in 1Q14, the 2014 profit estimate will be greatly affected. There could be a cut in GDP growth for 2014 and the "January effect" that usually boosts the SET may not happen.

Another issue is foreign investors' selling spree. In 2013, it amounted to about Bt200 billion. In the round of net purchases from early 2009, about Bt80 billion of shareholdings at market value remain in the market. This remaining amount will likely be progressively sold. This is another factor pressuring the SET early this year. Local institutional investors' trading direction needs to be monitored.

In 2013, net purchases of stocks passed Bt110 billion, which was the highest in history.

Early 2014 is expected to see political pressure on the stock market. We believe conditions will get better in the latter half of the year. Stock prices will reflect fundamentals more.

The proper investment strategy is weighing investment portfolios with industries that have strong fundamentals and estimates of high profit growth or high dividend yields or that stand to benefit from the situation.

Stock picks:

ICT group - INTUCH (fair value@Bt124) and DTAC (FV@Bt136)

Food group - CPF (FV@Bt33.71), TUF (FV@Bt76) and M (FV@Bt60)

Petrochemical and construction group - SCC (FV@Bt558)






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