February 10, 2014 00:00 By Tisco Securities 3,155 Viewed
Thailand's political situation has become even more complicated following the disrupted February 2 general election. We now anticipate several more months of political uncertainty, with the country unlikely to get a new government focusing on economic sti
Even with a new, properly functioning administration in the second half, the key focus is likely to be on political reforms rather than economy-boosting measures.
Tisco’s economic team now sees 2014 gross domestic product (GDP) growth of 3 per cent as the best-case scenario instead of a worst-case scenario.
Monthly macro data points for December were mostly weaker, especially private investment, reflecting the toll on business confidence. The private consumption index for December contracted by 0.2 per cent on year, improving from minus 2.4 per cent in November. The private investment index, however, extended its decline to minus 8.1 per cent year on year from minus 7.8 per cent in November.
The bright spot once again was the current account, registering a surplus of US$2.5 billion for the third straight month and narrowing the full-year 2013 current account deficit to $2.8 billion (minus 0.7 per cent of GDP).
The Bank of Thailand released January Consumer Price Index (CPI) data showing headline inflation at 1.93 per cent year on year and core inflation at 1.04 per cent year on year. Both were above our forecasts of 1.76 per cent and 0.94 per cent, respectively. Despite slightly higher inflation, we maintain our expectation of a 25 basis points policy rate cut on March 12 to account for growth headwinds caused by politics.
We prefer the SET’s external-facing sectors such as energy and electronics. Note that we have revised up our 2014-15 earnings forecasts for Delta Electronics (DELTA) and KCE by 11-12 per cent and 11-10 per cent based on our new forex rate assumption of Bt33 to the US dollar, up from Bt31.
We also believe investors should take a fresh look at tourism plays such as Airports of Thailand (AOT), Central Plaza Hotel (CENTEL) and Minor International (MINT). Their stock prices have been battered by the protracted political unrest but in our view the market is ignoring the long-term structural positives for the tourism industry. Although we have slashed our earnings and target prices, we still see upside of 24-27 per cent for the sector on a 12-month view.
Head of research
DBS Vickers Securities (Thailand)
The SET Index slid 1.5 per cent in the last two weeks to close at 1,295 on Thursday, with energy, banking and petrochem leading the fall. However, the SET still outperformed its regional peers, represented by the MSCI Asia ex-Japan Index, which plunged 4 per cent. Foreign investors remained net sellers at Bt26.5 billion. Retail investors, local institutions and brokerages were net buyers.
Politics continues to dominate the headlines. There is still no solution to the current political deadlock. The election on February 2 was incomplete and inconclusive. There was a low voter turnout as a result of the election boycott, disruption by protesters and safety concerns.
This has created a political vacuum. The Election Commission (EC) plans to hold an election for constituencies where 10,284 polls were disrupted. But this remains controversial and the polling date is yet to be concluded.
The caretaker government of Prime Minister Yingluck Shinawatra is facing a host of problems. The PM is being investigated by the EC for alleged abuse of authority in the recent polls campaign, and by the National Anti-Corruption Commission for alleged dereliction of duty involving the rice-pledging scheme.
Farmers are also staging protests as the government has failed to secure financing for at least Bt130 billion to pay more than a million farmers who had pledged 10 million tonnes of paddy worth more than Bt160 billion, as some legal issues remain unclear.
The Criminal Court has issued warrants for the arrest of 19 anti-government protest leaders. However, the targeted leaders insist it will not affect their campaign to demand the resignation of the caretaker government and push for national reforms.
It now appears Thailand is unlikely to have a new government sworn in by the first half. This could be a negative for the economy. Our 2014 GDP growth forecast for Thailand is 3.5 per cent, but that assumes the political crisis will be resolved soon.
GDP growth could fall to 2.5 per cent if there is no functioning government this year. The central bank has also said GDP growth could fall below 3 per cent. The consumer confidence index fell to 71.5 points in January from 73.4 in December, which means consumer spending will remain weak this year.
In terms of stock picks, we recommend to overweight the food, electronics, telecom and transportation sectors, which should be relatively resilient to the current political uncertainty. Our stock picks are Charoen Pokphand Foods (CPF), Thai Union Frozen Products (TUF), Delta Electronics (DELTA), KCE, Shin Corporation (INTUCH), AOT and BTS Group Holdings (BTS). We remain neutral on banking, property, energy, commerce and tourism, and are underweight in contractors, media and automobile.
The Ombudsman has said that it would not forward the Democrat Party’s petition to invalidate the February 2 election to the Constitutional Court, as the EC is responsible for the election.
In our view, this becomes a positive sentiment for investment, now that there is no risk arising from the Constitutional Court’s ruling. That situation also ends the SET’s downside risk from this issue. Back in 2006, the SET sharply dropped by 2 per cent in a week and 7.5 per cent in two weeks and 14 per cent in one month after the court ruled the election invalid.
The SET will swing in a narrow range of 1,220-1,320 points if there remains no positive/negative surprise in the political situation. With previous market corrections, some companies now carry attractive valuations. The following themes are our investment strategy for this month:
_ Blue chips with prices-to-book equal to or lower than one time: Bangkok Bank (BBL), BANPU.
_ Export-oriented stocks and cyclical stocks that gain from the global economic recovery: CPF, Hana Microelectronics (HANA), SVI Public Co (SVI), PTT Global Chemical (PTTGC).
_ Property stocks with the election rally theme: Supalai Public Co (SPALI).
_ Alternative energy stocks with assured earnings visibility: Energy Absolute (EA), Inter Far East Engineering Co (IFEC).
_ Communications stocks with specific positive factors: Jasmine International Public Co (JAS).