Liquidity-driven conditions anticipated

The Stock Exchange of Thailand should head up this week, thanks to the factors announced last week.

Last week, the US Federal Reserve announced the decision to maintain the extra-low level of the Fed funds rate until late 2014. This would directly weaken the US dollar and encourage a shift to other risk assets, particularly commodities and stock markets. Liquidity would drive all of them up. The Thai market would also benefit from the liquidity. Its price-to-earnings ratio could initially rise to 13 times early next month, from 12.6 at present. At the new P/E target, the SET Index should stay at 1,105 points. This assumes that earnings growth this year would stay at 8-9 per cent.

The Bank of Thailand's decision to cut the policy rate to 3 per cent would also send a positive signal to the Thai stock market, particularly property stocks that would benefit from the positive sentiment. Favourable are those that are now trading below fundamentals but show strong earnings growth and high dividend yields like SPALI, SC and SIRI. Viewing that the decision is in line with the global trend, we are of the view that the policy rate could be cut at least once more this year. This would further buoy the market.

Besides high liquidity, the Thai market should also benefit from higher oil prices on the back of increasing tension in the Middle East. Though high oil prices would hurt the global economy, they would benefit the Thai market given that energy stocks control 30 per cent of its capitalisation.

Our energy analysts expect the fair value of PTT, PTTEP and BANPU to rise by 1.5 per cent, 5.8 per cent and 7 per cent, respectively, assuming that Dubai crude oil averages US$100 per barrel. Our current earnings forecast is based on $90 per barrel. Under these circumstances, PTTEP is our top pick.

A factor to watch this week is the higher surcharges on commercial banks, after the four borrowing executive decrees take effect. Still, we believe that the impact would be limited to banks, as the news has been somewhat discounted. And small banks would be the most affected by the increase.