All eyes on US Fed amid limited upside room for SET

business March 19, 2018 01:00

By Thanawat Patchimkul
Head of Research
DBS Vickers Securities (Thailand)

The US Federal Reserve is in the limelight.



For global investors, the Federal Open Market Committee (FOMC) meeting tomorrow and on Wednesday will be one of the top events to keep a close eye on. It is almost certain that the Fed will raise its benchmark rate by 25 basis points in this meeting from the current level of 1.50 per cent. The pace of rate increases adopted by the FOMC members or “dot plot” is probably the key information to watch. The market is still debating whether the Fed will raise its benchmark rates three or four times this year. If the pace of the increases is faster than expected, this will rattle the US bond market once again.

The supply of US Treasuries is rising fast in the wake of expectations of rapidly expanding budget deficits. On the other hand, bond investors are lowering their US Treasuries holdings. According to data from the US Treasury Department released last week, foreign ownership in January fell to US$6.26 trillion, from $6.32 trillion during its peak in October last year. China had earlier threatened to reduce its US Treasuries holdings and the data shows that it reduced its US Treasuries holdings in January. The Fed has also embarked on its balance sheet reduction programme, which implies the absence of another key buyer of US Treasuries. Given the risฌing supply and perhaps lower demand by overseas investors, US interest rates will face upward pressures, which will prompt investors to continue reducing their US Treasuries holdings. DBS expects the Fed to raise its benchmark rates three times in 2018.

Tisco Securities

Given myriad domestic and external uncertainties, we see limited upside for the Thai market at current levels. After the lacklustre results in the fourth quarter of 2017, we have reduced our earnings per share slightly from Bt110 to Bt109 in 2018 and from Bt121 to Bt120 in 2019. However, we have slightly revised up our SET index yearend target to 1,850 to reflect the traditional “LTF inflow” rally in December.

Our yearend target implies 15.3 times forward price to earnings (P/E) – well within the range of forward P/E valuation levels. There could be upside if the election really does take place in February 2019 but it is unlikely to be much higher than 1,900. We think the key to successful equity investment this year is to buy stocks with positive catalysts in 2018, particularly in the telecom and energy sectors. 

We like TRUE for the DIF asset sale and expected return to profitability and INTUCH for potential upside to its current dividend payout. Other top picks include PTTEP (concession auction), PTTGC (strong spreads), IVL (M&A, rising PET and PTA demand/utilisation.), BBL (AIA partner, corporate loan growth), CPALL (banking agent licence) and CPF (commodity price, inflation play).

We also like BDMS (recovery in Middle East patient volumes) and select property plays, notably. LH, QH and PSH (growth in presales of lowrise projects). Note that we dropped KBANK, TMB and BH from our top picks list, as we see few positive catalysts for these stocks in 2018.

Although we see a risk of Thailand’s two major economic growth drivers (tourism and exports) becoming “exhausted” this year, ample domestic liquidity should help cushion market downside. Furthermore, the low base effect due to the sluggish second quarter of 2017 means it should be easy for some listed companies to report 1520 per cent earnings per share growth that quarter. Finally, we expect to see more progress on the Eastern Economic Corridor. While there is still uncertainty on how much value this creates for Thailand, the government’s plan at least creates “incremental positive” news flow for the SET.

 

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