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SET forcast

UBS foresees 1,530 SET Index but fears overheating

UBS Securities sees the SET Index spurting by 12.8 per cent to 1,530 points next year, but worries about signs of overheating in the bourse and the economy.

"From a bottoms-up perspective, while there are many permutations to get to the index target, our base case is that energy, financials, telecom and real estate could appreciate by 20 per cent in 2013," Raymond Maguire, strategist of UBS Investment Research, said yesterday.

The 1,530 level implies a forward price-to-earnings (P/E) ratio of 13.5 times and is more optimistic than the 1,471-point consensus of the Securities Analysts Association.

Of the 73 companies analysed by UBS, 29 per cent had an implied discount rate of 10 per cent or more, 19 per cent offered a dividend yield of 5 per cent or more and the universe offered median earnings growth of 15 per cent from 2011-14.

In the research, Maguire acknowledged that with the Stock Exchange of Thailand being the second-best-performing major market this year, up 36 per cent in US dollar terms, next to the Philippine market, up 41 per cent, asset allocators would no doubt be questioning the sustainability and value remaining within Thailand.

"Indeed, the North Asia versus South Asia debate is the main topic in most global investment committees today," he said. "However, as we have argued, the fundamentals in Thailand remain compelling, and a key driver to the Thai market is domestic capital that makes up 70-80 per cent of flows … that is, investors that do not have the luxury - or curse - of debating the China trade."

When trading resumes in January, investors normally analyse the previous year's performers to look for opportunities, usually resulting in buying the laggard plays. In Thailand, the energy and petrochemical sectors stand out in terms of 2012 underperformance.

There are several suggestions that the Thai economy is driven strongly by domestic consumption. There was a 63-per-cent year-on-year increase in car sales at the Motor Expo, while this year also saw a 15-per-cent increase in retail sales, a 53-per-cent increase in building permits, a 32-per-cent increase in mortgages and a 53-per-cent increase in advertising spending.

"Consumer credit to household income stands at 47 per cent. We believe 60 per cent could be reached by 2015 or 2016, at which point the Bank of Thailand could rein in credit," Maguire said.

UBS predicts an uptick in inflation across Asia in the second half of 2013. This suggests a 75-basis-point increase in the central bank's policy rate.

At a glance, the Thai economy looks much like China's in 2005, when Shanghai's A-shares rose 550 per cent, traded at 40 times prospective P/E.

Driving China then were relatively easy credit, full employment, the wealth effect, and rising gross domestic product per capita, infrastructure spending, expansionary growth from Tier 1 to Tier 2-3 cities,?? foreign direct investment, pension reform and exports.

GDP per capita has doubled for both countries in the last decade, while unemployment levels have been low, promoting consumption. While FDI as a percentage of GDP has been falling, it remains at healthy levels, especially in Thailand.

So far this year, Thailand has witnessed strength in Japanese investment, which has constituted a third of all FDI in the past, while Chinese FDI at Bt25 billion is the highest on record.

A key difference between the two markets has been China's investment in infrastructure, which has been typically 40 per cent of GDP, versus Thailand's 20-25 per cent. That could change with the government's US$72-billion (Bt2.2-trillion) infrastructure plan, or 20 per cent of nominal GDP over seven years.


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