SET@1,700: Reason to be cautiously optimistic

Flipping through a financial newspaper these days is not for the faint-hearted. To some, the current level of the SET Index, at 1,514, seems highly overpriced. A heavy correction is expected, and authorities seem to have the same idea.

I do respect these opinions, but would like to offer a different view. It might be possible that Thailand's economy in general and the SET Index in particular are en route to another plateau; this due to greater economic potential combined with amplified global liquidity. A recent Phatra Securities paper reflects this view, setting a new target for the Stock Exchange of Thailand of 1,700 points at the end of this year (about 10-15 per cent higher than today's range).

Using the Phatra paper as a guideline, I have come up with three reasons to support my argument of a somewhat sustainable rise in the Thai stock market. These are (1) the current state of the global economy, (2) the relatively cheap valuation of Thai stocks and (3) the paradigm shift in Thailand's economic fundamentals.

The first reason is supported by recent economic data. From a global perspective, recent good global economic indicators, coinciding with a picking up in the rich world's consumer confidence, may signal that the turbulence in the global economy is over, at least for a while. This is because of major central banks' liquidity injections, especially those of the US Federal Reserve and the Bank of Japan. This newly printed money finds its way to the emerging markets, where growth potential is promising, and Thailand is one of them.

The second reason is the cheap valuation of Thailand's stocks. Compared with those of Indonesia, Malaysia and the Philippines, Thailand's is the only bourse whose index has yet to reach its pre-1997 high. This is partly because during the last wave of capital inflow into the region (2004-07), the Thai market was haunted by political turmoil and policy uncertainty, while neighbouring countries enjoyed the benefit of relatively calm and stable domestic affairs.

This has been reflected in the stock market's performance. Of the four markets, Thailand's is trading on the lowest forward earning multiple while offering the highest dividend yield. Other valuation indicators such as return on equity and earnings per share also reflect this picture.

The third reason is a paradigm shift in Thailand's economic landscape. This constitutes four areas: (1) regionalism, by the integration of Asean Economic Community; (2) urbanisation and the rising middle class; (3) macroeconomic policies that aim to improve incomes in the lower to middle segment; and (4) the government's infrastructure policy.

In the first area, it is widely known that the Asean countries aim to create a region of freer mobility in trade, services, investment, skilled labour and capital flow among them in 2015. Of the five fields, freer trade seems to be the most progressive area. The original Asean-6 have already cut their import tariffs, while the four frontier markets (Cambodia, Laos, Myanmar and Vietnam, or CLMV) still have room to cut theirs. When tariffs are cut, combined with the rising incomes and economic prospects in these countries, Thailand will benefit the most from the regional integration thanks to our location advantage.

In the second area, it is known that as an economy progresses, people tend to change their living habits, from rural to urban areas. Thailand is no different. The urban population has increased from 19.7 per cent of the total population in 1960 to 33.7 per cent nowadays. Urbanisation implies consumerism. Sectors that reflect the growth of domestic economy, such as wholesale and retail, construction and real estate, will be among the first to benefit from this trend.

In the third area, it is also widely known that two of the most important populist policies of the current government are the improved minimum wage and the rice-pledging scheme. The minimum wage in some rural province such as Phichit and Phayao has increased almost 100 per cent, while the rice-pledging scheme can increase the price of jasmine paddy rice by about 33 per cent. Although the two schemes have drawn disapproval from several fronts, they have undoubtedly increased incomes for low-skilled labourers and farmers, especially in the countryside, so people can spend more.

In the last area, the infrastructure policy, it is also widely known that the state of infrastructure in Thailand is really poor. The government's massive infrastructure project and water-management plan, to cost a total of Bt2.7 trillion over the next seven years, is thus a necessity. And if this plan is carried out, surely it will be massively beneficial to several private companies, especially in the construction area.

All of these reasons give me hope of a better Thailand, and hence a new SET Index plateau. This hope, though, is still close to wishful thinking, because of three major risks.

The first is the constant uncertainties in Thai politics, which might lead to the delay or even the cancellation of the infrastructure projects.

The second is the global economy's condition and the Thai authorities' policies regarding capital flows. These two are related in the sense that if the global economic condition deteriorates again, or the Thai authorities implement some policies that frighten foreign investor, like the 30-per-cent capital-control measure in 2006, a massive sell-off is likely.

The third and final risk is skyrocketing wages due to the shortage of labour in Thailand. This is reflected in import of labour from neighbouring countries, especially Myanmar. The massive government infrastructure project means the need for a massive increase in labour supply in the future, especially low-skilled workers. If managed poorly, that might lead to a high jump in wages to attract labour, which might lower companies' net income and subsequently stock prices.

There are reasons to be cautiously optimistic, but investors must manage their portfolios wisely, to lessen the risk and maximise return, in this period of ample liquidity and elevated economic hope.

Piyasak.man@kiatnakin.co.th