Market View (July 19-23)

The Stock Exchange of Thailand Index could rise to 835-838 points at the end of this month, translating into the price/earning ratio of 14 times.

 The policy rate hike on July 14 did not pose negative sentiment on the market as feared, probably due to advances in overseas markets. Last week, Dow Jones Industrial Average advanced 6.9 per cent. In-depth analysis also showed that banking stocks could benefit from the higher rates, based on the loan and deposit structure. For 9 banks under our coverage, based on the loan/deposit ratio of 90 per cent, only 31 per cent of loans carries fixed rate while the rest is subjected to floating rates. In the deposit portfolio, 53 per cent of deposits carry fixed rates. Banks enjoyed higher transactions last week and the buying spree should continue this week. Meanwhile, with the expectation that their quarterly results would be impressive, banking stocks should be the main drive in pushing forward the SET Index.

 A factor to watch this week is the result of Europe's stress test, to be unveiled on July 23. It depends if the result could restore investor confidence. Personally, I expect a positive response, as the test is focused on financial institutions while the debt crisis is concentrated in the national government level. Moreover, many measures have been announced to accommodate the debt crisis. There should not be a significant concrete impact on financial institutions. Then, global stock markets should benefit from this and it should improve the sentiment on the Thai market.

On domestic political situation, there should be no significant movement leading to political changes in the next few months. However, focus is on the National Anti-Corruption Commission's ruling on Thaksin Shinwatra and accomplices over the order to have the Finance Ministry oversees the restructuring of TPI. NACC may rule that the order was above its authority. The issue interests investors as this could affect legal obligations endorsed by the restructuring planner.

 The main resistance line this week is 835-838 points. Banking stocks are the highlights. Our top picks are KBANK and SCB. TK is also interesting as it will benefit from the expansion in the motorcycle market, while 70 per cent of the funding cost is fixed.

Sukit Udomsirikul,

Senior Vice President

Retail Strategy Department, SCB Securities

The market is driven mainly by domestic excess liquidity, while foreign investment is on the sidelines. Stocks with small and medium market cap thus showed price hikes last week, particularly those with share prices below book value. However, this should be short-lived. Investors should beware in investing in stocks with low trading liquidity.

 The market advances should cease with the end of announcement on quarterly results, some time around late August. SET Index could hit 850 points.

 Still, volatility remains on concerns of global economic recovery, as the US and China may suffer from a slowdown in the latter half. Meanwhile, Japan and Europe are haunted by huge public debts, which limit the governments' ability in stabilising the economies. This could affect the prices of commodity stocks in the coal and oil industries.

Leading the market this week should be banking stocks. KBANK and KTB will benefit the most from higher interest rates, while share prices remain low. Their fair prices in the next 12 months are expected to be Bt128 and Bt15.7, respectively.

 Factors to watch this week include the result of Europe's stress test. If the financial institutions pass, their share prices should not advance much as they have not dropped significantly. Meanwhile, they still need to recapitalise to meet the more stringent rules. Meanwhile, the US is scheduled to announce housing indicators like Housing Start and Existing Home Sale. The indicators dropped in the past two months and generated huge concerns to stock markets.

 This week, buy into banking, food and retail stocks. Top picks are KBANK, CPF and CPALL. Stop buying when the Index falls to 808-815 points.

Tisco Securities

Thai equities have held up well in the first two weeks of July, with the SET index rising by 3 per cent during the period to 821 pts. The market has climbed steadily since late May after political turmoil subsided. Turnover has also increased with the average daily trading value rising by 8.1 per cent to almost Bt26 billion from Bt21 billion/day in 1H10. This implies that investors' confidence in the Thai market is gradually being restored.

Nonetheless, foreign investors have turned to be net sellers of the market in recent days while local institutional investors have generally staked a net buying position. We believe that this reflects concerns about renewed domestic political unrest and the sustainability of the global economic recovery, given the European debt crisis and indications that the Chinese economy may be slowing.

The SET index is now trading on a forward price earning ratio (PER) of as high as 11.9x, versus its historical average rating of 10.2x and the regional average of 13.1x. Nonetheless, the Thai stock market remains the second cheapest bourse in Asia after Korea, with an attractive dividend yield forecast of 4 per cent in 2010 and 4.7 per cent for 2011, compared with the regional average of 2.7 per cent and 3.2 per cent respectively.

The domestic economic recovery is proving stronger than was originally expected but inflationary pressure looks set to increase sharply over the next 12 months. After fully assessing the impact of the political crisis during the second quarter, the Bank of Thailand took the long-anticipated step of lifting its policy rate by 25bps on July 14. In explaining its decision the Monetary Policy Committee (MPC) noted that the global economic recovery remained on track in the first half, particularly within Asia. But downside risks to growth had risen due to the sovereign debt crisis in Europe and problems at some financial institutions.

Several commercial banks almost immediately followed suit, raising lending and deposit rates sooner than we had expected. This should be positive for net interest margins (NIM) of big banks whose earning assets are generally re-priced immediately, but whose deposits are re-priced with a lag in the case of fixed deposits, or not at all in the case of current and saving deposits (CASA). The latter make up 50-60 per cent of deposits for the big banks. We maintain our Overweight rating for the banking sector.