Positive sentiment expected in early 2013
At current levels, highest return likely at 9.5%, but investors advised to be cautious
Last year was a golden one for the stock market, which surged by 36 per cent on such policies as the third and fourth rounds of the United States' quantitative easing, low lending rates of the European Central Bank (long-term refinancing operations), Japan's QE, and China's policy-rate cuts and reserve requirement ratio (RRR).
The loose monetary shackles caused excess money to pour into stock markets across the world and drove the SET Index up to an unusual price-to-earnings ratio of 15.8 times, versus the normal range of 12-14.
This year, the expected market earning-per-share growth of 15 per cent will yield a market E/S level of 101.5. If the SET Index slips back to a P/E of 14 times, that will equate to the SET at 1,422 points. And if there is excess liquidity to raise the P/E to 15, that will equate to 1,523 points.
At the current SET level, the highest return will be about 9.5 per cent. If investors need higher-than-average returns, they will have to select stocks with fundamental strengths.
In 2012, foreign investors were net buyers of Thai stocks worth Bt86 billion after a big lot adjustment - the highest since about Bt120 billion in 2005. In 2011, foreign investors were net sellers of Thai stocks worth about Bt5 billion.
Based on their high net buying, foreign investors are expected to become net sellers in the next periods. Local institutional investors were net sellers of Thai stocks worth Bt24 billion in 2012, close to the three-year average of Bt25 billion per year.
ASP Research expects local institutional investors to take profits from long-term equity funds (LTFs) reaching their five-year maturity. Based on fund purchases of more than Bt26 billion in 2009 and the average cost of the SET Index at 674 points, such fund investment, at the current SET level, could have a market value of more than Bt50 billion. In the preliminary assessment, profit-taking could be at least Bt10 billion, which could put pressure on the Thai stock market this and next month.
This week, issues to be monitored include the US uncertainty that may affect fund flows and investment sentiment and January-February's likely Bt10-billion-or-more selling spree of LTFs that will reach maturity this year. With such issues, the SET Index could face corrections.
Less affected stocks are recommended in that case, including defensive ones with low volatility (Beta@0.136 times) and high dividend of 7 per cent. They include property funds, particularly Ticon Property Fund (TFUND), CPN Retail Growth Leasehold Property Fund (CPNRF) and Samui Airport Property Fund (SPF), as liquidity is high.
Another attractive group is stocks related to domestic consumption. They include retail, communications, entertainment and personal credit. ASP Research's top picks are Home Product Center (HMPRO; FV@B15.6) and InTouch (INTUCH; FV@B87).
Positive sentiment in the Stock Exchange of Thailand is likely to extend into early this year although global markets could quickly turn risk-adverse if the White House and Congress fail to reach a deal soon on the US fiscal cliff. Failure to agree on a compromise would take US$600 billion out of that country's economy from tax increases and spending cuts and risk pushing it back into recession. However, the latest news reports indicate that a short-term deal may be reached that would postpone any spending cuts for several more months.
Continued uncertainty over the "fiscal cliff" has so far mainly been offset by expectations of increased capital flows to Asian markets as a result of the US Federal Reserves's QE4 programme and asset purchases by the Bank of Japan.
Market sentiment is also being buoyed by a raft of positive domestic economic data for November including a 26.9-per-cent year-on-year surge in Thai exports, although admittedly from a low base, a more than fivefold jump in domestic new car sales and MPI (Market Potential Index) growth of 83 per cent YoY versus the consensus of 68 per cent.
Although there is a strong chance of a market correction later this month, we believe any pullback is likely to be brief and should be used as an opportunity to increase weightings. Note that we maintain our long-term positive view on banks due to the government's extended stimulus measures, which should further boost consumer demand.
Our long-term top picks are Kasikornbank (KBANK), Krungthai Bank (KTB) and Siam Commercial Bank (SCB) but we also like Bank of Ayudhya (BAY) in the short term as an attractively valued laggard play.
In the energy sector we have upgraded our rating on PTT Exploration and Production (PTTEP) to "buy" as we believe that its merger-and-acquisition risks are limited and that its recent Cove acquisition could be undervalued.
We forecast earnings growth of 19 per cent YoY in 2013, with the stock offering a dividend yield of 4.5 per cent at current levels.
Elsewhere we have initiated coverage of Workpoint Entertainment (WORK) with a "buy" rating and target price of Bt50.
We believe the company is well positioned to benefit from liberalisation in the broadcasting industry as well as its recent diversification into operating a satellite TV channel.
Other key earnings drivers in the near to midterm are new programmes on FTA TV, increased advertising rates and improving asset utilisation through the event-marketing business.