No support from capital market flow as the baht reaches its turning point
February 14, 2017 01:00 By THERDSAK THAVEETEERATHAM Executive Vice President / Research ASIA PLUS SECURITIES
THE decisions of several central banks, including the US Federal Reserve, to leave their benchmark interest rates and monetary stimulus measures unchanged came as expected.
The Bank of Thailand’s Monetary Policy Committee followed suit, keeping its key rate unchanged at 1.50 per cent.
These central banks’ decisions came after more signs of economic recoveries, while inflation rates are tending to rise.
Normally, this would result in rate rises. However, given concerns over external factors, particularly US economic policies, most central banks have maintained their benchmark rates at a low level.
Given the unchanged interest rates, exchange rates have seen less volatility, at least in the short term, and could prevent fast fluctuations in international capital movements. This could be one of the reasons behind the lack of clarity on foreign investors’ directions in the Stock Exchange of Thailand.
Each day, foreign net buys and sales were high. A clearer picture has been seen in the futures market, with short positions opened at a relatively high level.
For the rest of the first quarter, we believe foreign capital will not influence the SET Index. This is based on the Thai stock market’s expected return at a low of 3-4 per cent from now to the end of the year, compared with expected returns of higher than 5 per cent or as high as 15 per cent on key foreign stock markets.
The relatively low expected return compared with foreign-exchange risk could lead to foreign investors deciding not to bring their capital into the Thai stock market.
In the meantime, the selling spree is limited as foreign holdings of Thai stocks are currently at a record low in more than 10 years.
Based on the current environment, the SET Index will be influenced mainly by local investors, and as a result, the SET Index may not change much.
The index is not expected to surpass the upper run of 1,600-1,620 points, and the lower range may not go below 1,550-1,560 points.
Announcements of fourth-quarter 2016 earnings performance could trigger speculation in stocks in some industries. All are required to announce their performance by the end of this month. Combined net profit combined of listed companies is estimated at between Bt185 billion and Bt210 billion.
If the net profit comes as expected, the SET Index will not likely change significantly.
Meanwhile, speculation could arise in industries with a 4Q16 outstanding net profit such as steel, petrochemicals, retail and construction.
For a medium-to-long-term strategy, gradually accumulate stocks with high dividend yields that are expected to outperform the market easily.
Stock picks: LH (Land and Houses), PTTGC (PTT Global Chemical), SAT (Somboon Advance Technology), TCAP (Thanachart Capital) and SCB (Siam Commercial Bank).
The result of the Monetary Policy Committee’s most recent meeting reflects its decision to continue monetary easing as a way to prop up the Thai economic recovery.
KS Research expects the MPC to leave the policy rate unchanged at 1.50 per cent for the whole of 2017.
Given the low policy rate, concerns over the bond market after B/E (bills of exchange) defaults and the dividend-payment period from February to April, some capital is expected to shift from the bond market to the stock market.
The MPC’s evident intention to continue monetary easing while key central banks are likely to opt for more monetary tightening reduces the likelihood of the baht appreciating.
US Dollar Index rebounds
The US Dollar Index, after its depreciation by 2.72 per cent throughout January, has rebounded by 1.2 per cent this month. It is believed that the dollar has reached a turning point and will appreciate consistently for the following reasons.
First, US President Donald Trump’s trade policy could be more aggressive.
Second, there are political uncertainties in Europe – the start of Brexit negotiations, risks from elections in the Netherlands (March 15) and France (April 23 and May 7) with possibilities of Nexit and Frexit.
Third, the European Central Bank is meeting on March 9, the US Federal Reserve on March 15, and the Bank of Japan on March 16, with expected signals for more monetary tightening in the future. All this could lead to repurchase of the US dollar amid more speculation.
Therefore, the baht will struggle to appreciate, and expectations of rapid depreciation could pressure capital to flow out.