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Political crisis, risk of QE tapering cloud bourse

Our near-term caution on Thai equities remains. The political crisis and the formal indictment for murder against former prime minister Abhisit Vejjajiva continue to sour investor sentiment.

Meanwhile, the increased risk of tapering of the US quantitative easing programme at the December 17-18 meeting of the Federal Open Market Committee is weighing heavily on global markets.

The major risk remains potential for escalation of anti-government protests, which could damage market fundamentals beyond what are already discounted in stock prices. Even though escalation of protests is not our base case scenario, the higher-than-normal probability skews the risk-reward unfavourably given the market's 2014 forecast price-to-earnings ratio of 12.2 times, which is already a 0.6 standard deviation above the historical average, with earnings-growth forecasts of 11-12 per cent for fiscal year 2014-15 likely to be revised down.

A key question is whether the protesters will accept caretaker Prime Minister Yingluck Shinawatra's interim government or will press their demands for an appointed interim regime (possibly based on protest leader Suthep Thaugsuban's "people's council").

Two important considerations are: First, Yingluck's announcement that the King had approved the royal decree to dissolve the House of Representatives implies an endorsement of the normal electoral rules. Second, with the February 2 election less than seven weeks away, the anti-government group must now assess the sustainability of their campaign and decide whether to up the ante or wind down the demonstrations.

If the tide of public opinion in Bangkok shifts towards acceptance of elections and willingness to tolerate a brief Pheu Thai caretaker government, we would expect near-term political risks to the Stock Exchange of Thailand to subside. Nonetheless, we advise investors to maintain a conservative strategy and stick with major names that have dominant industry positions and strong and sustainable cash flows.

Among our key "Buy" ideas are ADVANC (Advanced Info Service), CPALL, PTT, PTTEP (PTT Exploration and Production), BCP (Bangchak Petroleum), TUF (Thai Union Frozen Products) and LH (Land and Houses).

Chanpen Sirithanarattanakul

Head of Research

DBS Vickers Securities (Thailand)

The SET Index eased 0.2 per cent in the last two weeks to close at 1,356.21 on December 12. It slightly outperformed regional peers (MSCI Asia ex-Japan Index), which fell 2.3 per cent in the same period.

Foreign investors remained net sellers on the Stock Exchange of Thailand at Bt30.8 billion value in the last two weeks, while local institutions and retail investors were net buyers. Year to date, Thailand has experienced the largest equity sell-off by foreign investors within the region, with a total net-sell position of Bt183 billion (US$5.7 billion).

On the domestic front, the prime minister has dissolved the House of Representatives and an election has been scheduled for February 2, 2014. Political tension has eased temporarily, but the impasse is unlikely to end soon, as protest leader Suthep Thaugsuban has demanded that Yingluck Shinawatra resign as a caretaker prime minister to pave the way for the setting up of a "people's council" to lead a programme of political reform.

Thailand's economic growth is likely to deteriorate further amid weak domestic sentiment, while the external environment is not strong enough to offset the domestic slowdown. The government's planned Bt2 trillion spending on infrastructure projects, which are keys to the growth outlook, will likely be delayed.

Externally, the US House of Representatives voted 339-94 to pass a two-year budget plan. This is an important step towards avoiding another government shutdown in mid-January and raising the federal debt limit before the February 7 deadline.

Investors will keep their eyes on this week's meeting of the Federal Open Market Committee scheduled for December 17-18. US Federal Reserve chairman Ben Bernanke will hold his last post-FOMC press conference and the Fed will release its economic summary projections.

The US Treasury yield curve has firmed across the board. While they do not see any rate hike in 2014, Fed Funds Futures brought forward the first Fed hike to mid-2015 from late 2015. The market is sending a message that tapering of the US quantitative easing programme is now a possibility at this week's FOMC meeting.

We expect the market to remain volatile as politics remain a major risk factor. We continue to advocate our selective "buy on dips" strategy on companies with strong fundamentals.

Our picks include DELTA (Delta Electronics), KCE (KCE Electronics), BECL (Bangkok Expressway), BTS (BTS Group Holdings) and CPNRF (CPN Retail Growth Leasehold Property Fund). These stocks are quite resilient to slowing domestic demand while offering relatively generous dividend yields of 3.2-7.8 per cent at their current prices.

Research Department

Trinity Securities

This week, the December 17-18 meeting of the US Federal Open Market Committee needs to be monitored. We expect the Federal Reserve to start tapering its quantitative easing (QE) programme for the first time in a range of US$10 billion to$15 billion per month after strong US economic figures and an easing fiscal crisis.

The US House of Representatives approved a new budget law that will likely allow the country to avoid a government shutdown on January 15, 2014.

If the Fed decides to reduce its QE programme, it is expected to have an impact on sentiment for one or two days as most investors adjust their investment portfolios. This can be seen from foreign investors' net selling in emerging stock markets and rises of 10-year Treasury yields to a level similar to that before the FOMC meeting in September when most investors expected QE reduction.

We expect the Fed to introduce the following measures to relieve markets if QE tapering is instituted. First, a reduction of the threshold for US unemployment from 6.5 per cent, which signals low interest rates for a long period. Second, a rate cut on IOER (interest on excess reserves), which drives money into the real economic system and raises financial liquidity.

Investment strategy: Finding a chance to sell before December 18, the date the Fed will make a decision on the QE tapering, is suggested for short-term portfolios. Holding stocks for profit-taking at around the end of this year is recommended for medium-to-long-term portfolios for benefits of LTF/RMF (long-term/retirement mutual fund) investment.

The following stocks, which follow the global economic recovery, are expected to outperform the market.

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

Transport group: TTA (Thoresen Thai Agencies).

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

Agriculture and food group: TUF (Thai Union Frozen Products), CPF (Charoen Pokphand Foods), STA (Sri Trang Agro-Industry).


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