March 24, 2014 00:00 By Chanpen Sirithanarattanakul
The SET Index has barely budged in the past two weeks, gaining only 0.7 per cent to close at 1,361 points on Thursday. But it still outperformed its regional peers, as represented by the MSCI Asia ex-Japan Index, which fell 4.4 per cent.
Foreign investors turned net sellers of Bt309 million. Local institutions were also net sellers of Bt1.3 billion, while local investors were net buyers of Bt2.5 billion.
The market continued to focus on politics as more negative developments panned out. News that the February 2 election was nullified by the Constitutional Court had a muted impact on the market, as this had been largely expected.
The new election date has not been announced. The ruling has led to further legal complications, meaning the political stalemate will be extended and the nation is unlikely to get a functional government by June.
Meanwhile, the National Anti-Corruption Commission (NACC) voted unanimously to indict the caretaker Senate Speaker and acting Parliament President for his alleged improper handling of the charter amendment bill on Senate composition. This ruling is another hurdle in the move to nominate a neutral prime minister.
Adding to the complexity, the NACC will soon make a ruling on caretaker Prime Minister Yingluck Shinawatra on the charge of dereliction of duty in the rice-pledging scheme. If the NACC votes to indict Yingluck, she will have to resign and one of her caretaker deputy prime ministers will take over the vacated post.
Given the extended political deadlock, the Bank of Thailand has revised down its GDP growth forecast for 2014 to 2.7 per cent compared to 2.9 per cent printed last year. The ruling on the February 2 election has not been factored into the new forecast, suggesting there may be further downside risk to growth.
Based on the current set of assumptions, which already excludes the proposed Bt2 trillion infrastructure investments, the central bank expects private investment to contract by 0.5 per cent this year before rising by 10.2 per cent next year.
And private consumption is expected to grow by just 0.3 per cent this year but 4.6 per cent next year. The recent 25 basis points policy rate cut to 2 per cent reiterates the concerns over the weak economy.
The market is trading at 12.5 times 2014 price to earnings (P/E), slightly below its historical average of 13. We have recently revised down corporate earnings growth to 9 per cent from 12 per cent, but there could be further downside risk.
We recommend to overweight electronics, petrochemicals and commodities. Our top picks are KSL, SCC, DELTA, INTUCH and BTSGIF.
The SET has breached our earlier 2014 target of 1,350 and we revised up our target to 1,420. There are three key reasons for our more positive stance on the market.
The damaging effect from the political turmoil since October has been amply discounted in lower stock prices and reduced foreign holdings while consensus downgrades of 2014 SET earnings per share forecasts have mostly run their course.
Earnings growth recovery in 2015 should emerge as a positive theme as street estimates roll forward to the new forward year over the course of the next several months. We forecast aggregate earnings growth accelerating to 12 per cent next year from 8 per cent this year.
Equity discount rate compression is underway, reflecting a narrowing of Thailand’s country risk premium since the withdrawal of the Bangkok Shutdown protest campaign early this month, as well as persistently subdued US and Thai benchmark bond yields.
We believe the Constitutional Court’s nullification of the February 2 election should prove favourable for the market given the legitimacy issue created by the Democrat Party’s election boycott.
Our current strategy focuses on stock selection where 27 out of 56 of our coverage universe stocks offer upside of 15 per cent or more to our target prices, many of which have already been cut aggressively.
Our key buy ideas are ADVANC, JAS, CPALL, CPN, HEMRAJ, SPALI, STEC, IVL, BCP and TCAP.
The Constitution Court ruled 6-3 on the invalidity of the February 2 election, as the polling could not be held on the same day nationwide. We expect more political chaos. The issues that should be monitored are the following:
_ The PDRC’s position: Whether it will insist on national reform before the election.
_ The Democrat Party’s position: Whether it will field candidates for the election.
_ The UDD’s position: How it will react to the court’s ruling.
We focus more on valuation. Presently, there is no positive development in either absolute or relative terms. We have not seen funds flow to support the SET Index.
Last week, the most important issue was Fed chair Janet Yellen’s statement with an unexpected schedule for the rate rise. Yellen said the benchmark rate may increase about six months after the end of the quantitative easing.
Investors could have some satisfaction with US inflation at a low level, as reflected by PCE inflation at 1.1 per cent, compared to the Fed’s target of 2 per cent. As long as the US inflation level remains low, we expect low risk for the fed funds rate to rise.
Based on our study of the rate cycle since 1994, the SET had a good direction one year before a Fed rate hike. This is in line with our expectation of the SET to move sideways up.
We recommend slowing down investment. The SET at 1,330 is attractive for stock accumulation in terms of valuation. The following stocks are expected to outperform:
_ Export-oriented stocks as a result of the baht’s depreciation: CPF, TUF, SVI and HANA.
_ Shipping stocks as a result of the Baltic Dry Index’s rise in both spot and futures markets: PSL and TTA.