Rate hikes and trade wars cast a shadow
Executive Vice President / Research
Asia Plus Securities
Capital may move out of stock markets amid the likelihood of the US Fed hiking its key rate two more times this year, the reduction of the European Central Bank’s quantitative easing and concerns over trade wars.
The SET Index dipped to below its 200-day moving average. Technically, this is a negative sign. Short-term speculation involves high risks. But another view is that the pressure from upward rate trend will not affect listed companies’ profitability significantly as average net gearing ratio is below 1 and most debts are long-term fixed income with fixed rates. Therefore, the SET Index dropped to about 1,700 points, which has prompted its price to earnings ratio at the year-end to 15.5 times. This is proper to select stocks with sound fundamentals for long-term investment. The SET Index is expected to stay in a range of 1,6801,725 points.
This week, there are two external factors: trade wars between China, the EU, Canada, Mexico and the US and their likely retaliation; and the Opec and Non-Opec meeting.
Two local factors are expected to insignificantly impact the SET Index. These are the State Railway of Thailand has drafted the terms of reference for the high-speed train which will connect three airports, and finalisation of TFRS9, the financial reporting standard.
We prefer commercial banks, which will gain from the upward interest rate trend and, thus, see higher net interest margin to help offset lower fee-based income and lower income from online transactions. Stock picks: BBL (fair value @Bt220) and KBANK (FV@Bt227).
The June-12-13 Federal Open Market Committee meeting ended with the Fed’s relatively hawkish signals of US economic expansion at a brisk rate, declining unemployment and household spending picking up. The Fed also raised its forecast for this year’s GDP growth and for this year’s expected interest rate hike.
The Fed’s hawkish tone will prompt US 10-year bond yield and US dollar to continue to rise in the long term. It’s possible to see a steeper yield curve. The spread of 10Y-2Y bond yields could widen. As markets already have priced in the Fed’s likely rate rises by four times this year, short-term market reactions were not severe.
The day after the FOMC meeting, the ECB meeting took a different tack from the Fed. The ECB maintained its policy rate and bank deposit rates, but expressed concerns over economic risks and sent dovish signs with APP extension and planned reinvestment after APP expiration.
The Bank of Japan’s meeting also insisted on continuing its monetary easing which will have the global liquidity at high level and extend the investment period in emerging markets. Pressure from capital outflow is expected to ease. Corrections in emerging markets, including the SET, are expected to improve.