Year-to-date Brent prices have averaged around US$53/barrel (Bt1,757), which is significantly higher than the 2016 level of US$45/barrel. This presents an opportunity to pick up some oil and gas stocks to ride on the sector’s recovery story.
There are several factors underpinning the upward revision in the Brent price forecast. First, we believe global demand growth will be robust. This is not much of a surprise given the improving economic growth outlook for most countries. Second, the pace of oil inventory drawdown in 2017 is faster than in 2016. Besides, the inventory level is also currently lower compared to a year earlier. Hence, the seasonal inventory build-up in the first quarter should support oil prices.
Finally, we believe Opec countries are likely to extend the production cuts beyond the current timeline of March 2018.
Meanwhile, as we expect productivity gains in the US shale industry to inch closer to the limit, production cost is likely to rise. As a result, US shale production growth is likely to be tempered going forward.
Our top picks are CNOOC Ltd (883 HK), Sembcorp Marine (SMM SP), Medco Energi Internasional (MEDC IJ), and Bumi Armada Bhd (BAB MK). For the Thai market, PTT Group is our preferred oil and gas play.
Following a series of disappointing earnings earlier in the 3Q results season, the market is now starting to see some earnings beats. As of November 10, we saw beats from GLOW (+10.7 per cent), GPSC (+13.5 per cent), and food (TU +14.25 per cent). Some results were in line such as GLOBAL (-1) and HMPRO (+4 per cent) while notable misses included BANPU (-26 per cent) and IVL (-19 percent). However, we still think it’s unlikely that there will be much in terms of year on year earnings growth for the SET index in 3Q given the scale of misses in the banking and energy sectors.
Meanwhile the Thai telco sector – which at one point fell between 10-25per cent since its October peak – has begun to recover from the initial shock of the NBTC’s spectrum auction announcement last week. We maintain our view that we should not see a repeat of the spectrum licence overbidding in 2015, and the selling was overdone. However, we acknowledge that this overhang could take several months before it is resolved.
Lacklustre 3Q17 earnings, a fading of foreign fund inflows and concerns about an expected US rate rise next month are likely to keep the SET index stuck in a narrow trading range this month. Nonetheless we expect continuing upbeat domestic macro data and year-end LTF buying to cushion market downside risks. Key drivers that should also support Thai equity prices include higher commodity prices, the rise in the Consumer Confidence Index to a six-month high, the November 11 to December 3 shopping tax break and strong tourist arrivals from Asia, particularly China.
Although aggregate bank earnings missed our forecast by 8 per cent, we view the sector as in the early stages of recovery and expect core profit and asset quality to continue to improve as the NPL cycle shifts from retail/SME toward corporates. Note that we have just upgraded our rating on SCB to “Buy” based on our view of a declining credit default risk by PACE.
If last week’s talks about likely postponement of US corporate income tax reduction to 2019 become true, the US stock markets will significantly drop as investors have priced in the US tax reduction, which was expected to start next year. On the contrary, if the US tax reduction postponement takes place, there will be positive sentiment for emerging stock markets and capital could flow into this region again.
In the short term, the US dollar is depreciating, which could give positive impacts on emerging-country currencies and the baht. However, it will limit the upside of export-oriented stocks in the short term again.
This week’s major issues include the review of stock list for MSCI and shopping tax incentives. The shopping tax incentives are expected to boost purchasing power particularly among middle-income earners at some level, while some retail stocks were factored in this issue and there may not be much further movement.
Investment strategy: The SET Index is expected to swing in a range of 1,650-1,750 points for the rest of this year. Its upside will be limited upon its valuation and downside will be sustained by LTF/RMF purchases. We continue “Selective” strategy. In the short term, we pick hire-purchase banks, auto parts makers, retail operators. Long-term stock picks are electronics and industrial estate.