With the SET Index' limited upside risk, there exist alternatives for trading.
In the first six months of 2014, the SET Index rose 14.4 per cent, contrary to the downward revision of estimates for listed companies’ 2014 profit as a result of the political impact and cuts in forecasts for this year’s growth in gross domestic product to 2 per cent. This situation has prompted the SET Index to trade on a higher price-to-earnings ratio.
The issue is, what is the proper PER for the Stock Exchange of Thailand? The answer is based on the market’s earning yield gap, which is the difference between return on the Thai stock market and one-year bond yield.
From 2004 to the present, the average earning yield gap was 5 per cent (stock-market earning yield was 5 per cent higher than one-year bond yield). If we set a 5-per-cent earning yield gap and a 2-per-cent one-year bond yield as targets, we can calculate the PER as 14.29 times. If we lower the earning yield gap to 4.5 per cent, the proper PER is 15.38 times.
While previous trading behaviour is considered, the SET Index is able to move in a PER range of 14-16 times with stability. At a PER of more than 16 times, relatively heavy profit-taking usually follows.
Based on the above information, the Thai stock market’s proper PER should stay in a range of 14-16 times. Therefore, strategically, the SET Index with PER of more than 15 times could see limited return and, compared with risks, may not be worth investing in. It’s not suitable for stock accumulation for long-term investment.
With the SET Index at 1,500 points, the current PER will be 15.8 times, and PER at the end of 2014 will stay at 15.3 times. In the overall picture, it’s not proper for stock accumulation for long-term investment. Strategically, short-term trading will be seen, while stocks with positive sentiment in each period will be picked.
This month, the issue could be earnings performance in the second quarter of 2014.
Based on a survey of analysts for fundamentals on expected 2Q14 earnings performance, listed companies’ second-quarter profit base may not be higher than in the first quarter, which stays at Bt240 billion, as major industries are expected to see steady performance quarter on quarter.
Commercial banks’ credit in the first five months grew by only 0.96 per cent from the end of 2013. In the second quarter, the ICT (information and communications technology) group normally sees its low season for earnings generated from mobile-phone business. The energy-petrochemical group gains support from higher product prices, but pressure from lower refinery prices and aromatics business remains.
The residential-development group will likely see outstanding 2Q14 performance, given certain recoveries in new-home presales and targets for income realisation. This will benefit 2Q14 financial statements.
Stock picks for speculation on performance: AP (fair value Bt7.10), SC (SC Asset, FV@Bt4.45) and RML (Raimon Land, FV@Bt2.38). All three companies are in the residential-development group, which could witness upside risk from fair value and consistent growth for the rest of this year.
Stock picks from other industries: THCOM (Thaicom, FV@Bt50), the most outstanding in the ICT group, and PTTEP (PTT Exploration and Production, FV@Bt195), the most outstanding in the energy group.
Head of Individual Client Research Group
The Stock Exchange of Thailand gained 1.24 per cent from last week to close at 1,500 points after the European Central Bank issued a statement that it would not have much tolerance for a rising risk of deflation and a sluggish credit market.
The implication is that the ECB will continue to provide liquidity to the real economy through its long-term refinancing operation programme. The LTRO is a cheap loan that the ECB provides to most European banks during a financial crisis that is backed by collateral through national central banks.
At the same time, US Federal Reserve chairwoman Janet Yellen hinted that the Fed would not change its monetary-easing policy until the United States achieves full employment. She also presented her view that rising inflation in this circumstance should be temporary.
The analyst consensus predicts that the Fed should take some action in the second half of 2015. In this case, the equity market should gain most among several assets during global economic expansion.
We expect that the Thai stock market should perform well this week with resistance of 1,530 points on anticipation of economic recovery. Stock picks are SCC (Siam Cement), ROBINS (Robinson Department Store), RML (Raimon Land), SC (SC Asset), PSL (Precious Shipping), and TTA (Thoresen Thai Agencies).