GLOBAL STOCK MARKETS continue to climb to fresh highs as investors are upbeat on the improving growth outlooks in the United States, China, and much of the rest of the world. However, a number of investors have begun to be cautious on how much further the markets can rise. Market valuations are at the higher end of a historical range.
Head of Research
DBS Vickers Securities (Thailand)
Assuming that market corrections will begin, investors will rush into a defensive strategy, as they have done in every market down-cycle. We believe it might be a good time for risk-averse investors to think about getting into low-volatility stocks in an effort to limit the downside while capturing a significant portion of the upside.
One choice for overseas investment exposure might by iShares Edge Minimum Volatility exchange-traded funds. According to statistics provided by BlackRock, these minimum-volatility ETFs capture a large part of the market gains while the downsides are significantly lower. For instance, the iShares Edge MSCI Min Vol USA ETF (USMV) invests in 185 stocks with low volatility such as AT&T, Johnson & Johnson, McDonald’s Corp, and Procter & Gamble.
When the market was down, the ETF lost only 49 per cent of the broad market. On market gains, the portfolio captured as much as 78 per cent of the gains. The statistics could deviate from these numbers in the short term but should not be significantly off track in the longer term. The ETF has an expense ratio of only 0.15 per cent, considerably lower than traditional mutual funds.
Apart from the USMV, iShares offers a minimum-volatility ETFs based on a developed-market portfolio (EFAV) and an emerging-markets portfolio (EEMV) as well.
We recommend that investors study the risks in their prospectuses before making decisions.
The Stock Exchange of Thailand appears to have snapped out of its March doldrums, with sentiment lifted by US Federal Reserve chairwoman Janet Yellen’s statement that future US interest-rate increases will be “gradual”.
The Fed raised its benchmark interest rate by 25 basis points last Wednesday, in line with market expectations, and hinted at two more increases this year.
The SET was also buoyed by the results of the Dutch election and a rebound in oil prices after a surprise drop in US oil inventories.
While there is risk of further capital outflows from the Thai equity and bond markets (particularly as a new monetary tightening cycle sets in), we see several factors that should shore up investor confidence.
These include an agricultural-sector recovery (led by rice and rubber), rising oil prices, improving exports, higher private consumption (note that the Consumer Confidence Index has risen for four straight months), start-up of government infrastructure projects, and a recovery in tourist arrivals after the end of the mourning period.
With 6-per-cent upside to our year-end SET Index target of 1,650 points, we anticipate a more selective rather than broad-based re-rating for the market. In our view, banks and retailers will be among the major beneficiaries of the recovery in farm income and subsequent pick-up in upcountry spending.
Accordingly, we have added KKP (Kiatnakin Bank), CPALL, ROBINS (Robinson Department Store) and MC to our top-picks list as well as SCB (Siam Commercial Bank) and BBL (Bangkok Bank), which should benefit from lower NPL (non-performing loan) growth trends in the second half of 2017.
We also maintain our previous favourites of PTT (state-owned-enterprise reform and higher oil prices), AOT (Airports of Thailand; SOE reform and tourism recovery) and DTAC (Total Access Communication; potential for spectrum acquisition).
We are also more positive about the outlook for SCC (Siam Cement) this year. Demand for construction materials began to improve in the fourth quarter of 2016 after bottoming out in the previous quarter. Apart from infrastructure-project construction, we anticipate a growing number of residential projects in Bangkok and upcountry, which should drive cement demand.
Robust cement-demand growth in Indonesia, Myanmar, Laos and Cambodia, countries where SCC has a strong presence, should also be a positive catalyst for the stock.
Several stocks with high valuations witnessed sharp drops in their prices last week, reflecting investors’ focusing more on valuations after several stocks rose irregularly higher than their fundamentals.
Our view is that the market corrections came mainly from P/E (price-to-earnings) contraction. This excluded negative news for some companies. This risk, which we have reiterated since early this year, resulted from expected rises in interest rates and bond yields across the world. It has come sooner than expected because of the US Federal Reserve’s interest-rate increase this month, sooner than our June estimate.
Amid a P/E contraction, stocks usually receive adverse impacts, include those traded at high P/E ratios while their profit-growth rates could not cope.
Based on our screening of stocks in the Stock Exchange of Thailand and Market for Alternative Investment according to the latest Bloomberg consensus with four criteria – PE, PEG, PBV and PB/ROE – stocks with cheap valuations come in early rankings and those with high valuations come in late rankings.
Then the averages are calculated for each stock and rankings are made according to the averages. Stocks with cheap valuations will see the lowest averages and those with high valuations will have the highest averages.
Based on our study, the first 30 stocks with concerns for valuations are RS, NETBAY, AU (After You), VGI (VGI Global Media), BH (Bumrungrad Hospital), APCO (Asian Phytoceuticals), CHG (Chularat Hospital), BEAUTY (Beauty Community), CBG (Carabao Group), BCH (Bangkok Chain Hospital), SPA (Siam Wellness Group), TNR (Thai Nippon Rubber Industry), BDMS (Bangkok Dusit Medical Services), VIBHA (Vibhavadi Medical Center), TACC (T.A.C. Consumer), TKN (Taokaenoi Food & Marketing), FN (FN Factory Outlet), PLANB (Plan B Media), S (Singha Estate), PTG (PTG Energy), LPH (Ladprao General Hospital), MAKRO (Siam Makro), HMPRO (Home Product Center), DTAC (Total Access Communication), CPALL, WORK (Workpoint Entertainment), GLOBAL (Siam Global House), AUCT (Union Auction), PIMO (Pioneer Motor) and MINT (Minor International).
Investors should buy these stocks cautiously or avoid them when the overall market conditions are fragile in terms of valuations. Taking these 30 stocks into consideration, their P/E ratios are higher than 20 times, with the group’s average P/E ratio at 51 times. However, their average profit growth is forecast at only 22 per cent per annum over the next two years, so PEG (P/E-to-growth ratio) is higher than 2 times.