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Little holiday cheer during last week of year

The SET Index fell 3.5 per cent in the last two weeks to close at 1,308.46 on December 26, under-performing regional peers (represented by MSCI Asia ex-Japan Index), which fell an average of 0.25 per cent in the same period. Foreign investors remained net sellers but with a lighter volume of Bt10.8 billion in the last two weeks, while local institutions and retail investors were net buyers at Bt8.4 billion and Bt6.7 billion respectively.

Chanpen Sirithanarattanakul

Head of Research

DBS Vickers Securities (Thailand)

On the domestic front, there is still no sign of a clear solution to the political impasse. The February 2 election may be postponed despite caretaker Prime Minister Yingluck Shinawatra's declaration to set up a National Reform Council. After clashes between police and anti-government protesters last week, the Election Commission has advised the government to postpone the polls. Some EC members may resign voluntarily if it is not, which could cripple the commission and prevent it from performing its duty. The Internal Security Act enforced in Bangkok and three adjacent provinces has been extended to March 1.

At the macro level, the economic outlook remains dire. The Fiscal Policy Office has reduced its 2013 growth target for Thailand's gross domestic product to 2.8 per cent from 3.7 per cent. The FPO still expects growth to reach 3.5-4.5 per cent in 2014, but that assumes a new government is sworn in by March and mega-project budgets are disbursed by midyear. The Bank of Thailand has also voiced concerns that 2014 growth could dip below 4 per cent, with politics and capital flows remaining the key risks.

The weak baht is another issue to watch. The currency has slipped against the US dollar since the second quarter of 2013 to Bt32.8, its weakest in four years. The nominal effective exchange rate indicates that the baht could continue to weaken against other currencies, but not as severely as in 2009. Both external and internal factors, that is, tapering of the US quantitative easing programme and political uncertainty at home, will continue to pressure the baht, which would benefit the export sector in the medium term.

The stock market could remain volatile with the domestic political tension. We recommend investors buy on dip companies with strong fundamentals. Our preferred sectors are food, electronics and petrochemicals. Our stock picks include CPF (Charoen Pokphand Foods), CPALL (CP All), DELTA (Delta Electronics), KCE (KCE Electronics) and PTTGC (PTT Global Chemical). These stocks are quite resilient to slowing domestic demand and should report strong earnings growth in 2014.

Kitpon Pripisankit

Equity Analyst and Strategist

Kasikorn Securities

Last week, the SET Index plunged 44.01 points or 3.28 per cent. Although foreign investors' sales dropped from Bt3 billion per day to Bt1 billion per day, local investors slowed down their investment on concerns over the political situation. Protesters blocked candidates from registering for the election, and that led to deadly violence. LTF/RMF (long-term equity funds and retirement mutual funds) buying has been weaker than last year. The SET Index closed the week at 1,298.71 points, breaking through the psychological level of 1,300.

There are two trading days for the first week of this new year. The SET Index tends to continue its fall, amid the following factors.

First, capital will likely flow out of emerging markets consistently.

The second factor is a selling spree of LTFs that reach five-year maturity, to lock up profit. Investors who bought them in 2010 will earn 25-85 per cent profit over their costs.

The third factor is the political situation and reviews by the National Anti-Corruption Commission and the Constitutional Court, which could lead to a delay of the election currently scheduled for February 2 and no certain solution.

The SET Index remains at downside risk despite being close to the fundamental support level of 1,260 points (11 times forward price-to-earning ratio, or PER). In the worst case, the index will drop to test 1,200 points, which is the average cost of foreign investors who accumulated stocks in the past five years.

Combining these factors with economic figures, most of which are expected to get worse during the fourth quarter of 2013 and the first quarter of 2014, we expect the SET Index to bottom out in a range of 1,200-1,260 points this quarter. We see this as a golden opportunity to make gradual investments for the medium term.

Focus on safe stocks with high cash flows and high dividends. Stock picks: ADVANC (Advanced Info Service), DTAC (Total Access Communication), PTTGC (PTT Global Chemical) and SCC (Siam Cement). Also focus on recovering stocks: CFRESH (Seafresh Industry), PRANDA (Pranda Jewelry) and SAT (Somboon Advance Technology). We suggest accumulating stock picks in the food and electronics groups - CPF (Charoen Pokphand Foods), TUF (Thai Union Frozen Products), GFPT, KCE (KCE Electronics) and DELTA (Delta Electronics) - when prices drop after sharp rises.

Tisco Securities

There was little Christmas cheer for the Thai market over the holiday period. Protest leader Suthep Thaugsuban vowed to step up his campaign to disrupt the February 2 election. Investor sentiment was further undermined when the Democrat Party decided to boycott the election, just one day after the army chief warned of the risk of civil war if the political conflict continued. Meanwhile the Finance Ministry cut its 2014 growth forecast for gross domestic product from 5.1 per cent to 4 per cent.

Not surprisingly, the Stock Exchange of Thailand continued its downward drift while the baht hit a four-year low against the dollar. Although foreigners were net buyers on December 25 of Bt4.1 billion, this was mainly because of a massive block trade in CPALL shares. Foreign investors were net sellers of more than Bt37 billion in December after a net-sell tally of Bt48 billion the previous month.

We expect foreign investors' appetite for Thai equities to remain subdued in the near term, with the baht likely to weaken further in the light of capital outflows, tapering of the US Federal Reserve's quantitative easing programme, continued political unrest and weak export growth.

Note that based on Customs Department figures, exports for November 2013 fell by 4.1 per cent year on year to US$18,757 million (versus -0.7 per cent in October), worse than our estimate (+2.9 per cent) and market expectations (-2 per cent). On a year-to-date basis, export growth dipped by 0.4 per cent year on year. Although Tisco's economic team now expects exports to miss its 2013 growth target of 1 per cent, it forecasts a rebound of 7 per cent in export growth next year based on a global economic recovery.

One Thai industry that did see some festive cheer was agribusiness. Japan officially lifted the 10-year ban on fresh-chicken imports, a positive development for CPF (Charoen Pokphand Foods) and GFPT. Meanwhile domestic chicken prices have risen to Bt46 from Bt40 in recent weeks as suppliers have yet to ramp up production.

TUF (Thai Union Frozen Products) also received positive news after the Thai Shrimp Association announced that it expected shrimp exports for 2014 to jump by 20 per cent in both volume and value thanks to a sharply higher output through recovery from the shrimp disease early mortality syndrome and rising export demand.

Trinity Securities

Thailand's policy-rate cut and the US Federal Reserve's announcement of its plan to taper its quantitative easing programme prompted a significant reduction of the yield gap between Thailand's short-term bonds and US short-term bonds. Recently, the yield gap dropped to its lowest figure since March 2011, and thus Thai bonds became less attractive in comparison. That may cause foreign capital, particularly from hedge funds, to flee the Thai bond and stock markets, which could prompt depreciation of the baht. We expect export-oriented stocks to outperform the market.

Recently, the 10-year US bond yield went close to 3.0 per cent, which could continue to pressure the Stock Exchange of Thailand's earning yield gap despite its recent rises as a result of drops in the SET Index. So foreign investors may be interested in the Thai stock market at a low level. Besides, the local political factor remains highly uncertain, discouraging foreign investors from move their capital out of Thai capital markets.

The Bank of Thailand's economic report for November said domestic demand continued to contract, while tourism has been adversely affected by the local political situation, reflected by a lower number of foreign tourists. Avoid domestic demand-related stocks, as well as hotel and airline stocks.

Investment strategy: Find the right timing to reduce investment portfolios. The SET Index is expected to be pressured from a selling spree of bore than Bt12 billion worth of long-term equity funds (LTFs) that will reach maturity this month and from foreign investors' sales as a result of narrower yield gaps for both bond and stock markets. These LTFs' stock purchases on average were made when the SET Index was at 950 points only. The following stocks that depend on the global economic recovery are expected to outperform the market.

Electronics group: SVI, HANA (Hana Microelectronics), KCE.

Transportation group: TTA (Thoresen Thai Agencies).

Petrochemical group: SCC (Siam Cement), PTTGC (PTT Global Chemical), IVL (Indorama Ventures).

Food and agriculture group: TUF, CPF, STA (Sri-Trang Agro-Industry).


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