Head of Research
DBS Vickers Securities (Thailand)
After the return of risk appetite, investors have been pouring significant amounts of money into emerging-market exchange-traded funds so far this year. More than US$22 billion has flowed into these ETFs year-to-date.
Despite its small weighting in emerging markets, the Stock Exchange of Thailand has benefited from the massive inflows.
Foreign investors, including mutual funds, hedge funds and ETFs, have bought a hefty Bt106.5 billion (about $3 billion) net of Thai shares so far this year.
As the US markets continue to perform well, we believe there is a good chance that the money will keep flowing into emerging markets. The simple reason is that portfolio managers will have to add emerging-market stocks to keep their asset allocation in balance. Funds that had been underweight emerging-market stocks need to catch up.
While the SET weighting in major indices is small, it will still stand to benefit from fund inflows. Take the Vanguard FTSE Emerging Markets ETF (VWO), the largest emerging-market ETF with $42.9 billion in assets, as an example. The ETF allocates a 3-per-cent weighting to Thailand.
The second-largest emerging-market-focused ETF, iShares MSCI Emerging Markets ETF (EEM) with an asset size of $31.5 billion, has allocated 2.25 per cent to Thai stocks.
According to DBS Bank economic research, the hunt for return has continued in fixed-income markets, which can lead to corporate bonds and high-yield bonds outperforming investment- grade bonds.
The research report cited positive spillover effect to the equity markets as well. Although the valuation for most asset classes is already somewhat stretched, investors are now focusing more on relative valuation than on standalone fundamental value. However, we believe the current risk-return conditions do not justify a further rally for most asset classes. Investors should gradually lock in profits on market strength.
The Stock Exchange of Thailand has remained surprisingly resilient since the August 11-12 bombings thanks to a combination of stronger-than-expected second-quarter GDP growth of 3.5 per cent (versus 3.3 per cent consensus) and better-than-estimated earnings (stocks under our partner Deutsche Bank’s coverage beat the Bloomberg consensus by 9 per cent on average). Subsequently, we expect to see upward EPS (earnings per share) revisions by the dtreet in the coming weeks. Nonetheless, with the SET currently trading close to its historical average forward P/E (price-earnings ratio) of 15.3 times, we see limited upside for Thai equities in the near term.
Major sectors that exceeded consensus estimates were petrochemicals (higher by 19 per cent), tourism (higher by 21 per cent) and telecom (higher by 27 per cent). However, we think the market is generally unexcited about the bulk of telecom earnings surprises given that they mostly derived from accounting treatment.
Meanwhile sentiment for tourism-related stocks will be dampened by this month’s wave of bomb and arson attacks in several provinces south of Bangkok. For banks, there is potential for credit quality to be affected (particularly for small and medium-sized enterprises) as the attacks could hurt tourism operators during the critical fourth-quarter high season.
We also believe all of the good macro news is already priced into SETBANK’s rally of 23 per cent year-to-date and that the sector’s risk/reward ratio is not so attractive at current levels. Hence we have downgraded our ratings on SCB (Siam Commercial Bank), KBANK (Kasikornbank) and TMB to “hold”, leaving TCAP (Thanachart Capital) as our only “buy”-rated bank stock.
With the notable exception of Ch Karnchang (CK, whose second-quarter normalised earnings surged 213 per cent year on year and 292 per cent quarter on quarter because of its Xayaburi Dam operations), most contractors reported lacklustre results.
Note that we have downgraded STEC (Sino-Thai Engineering and Construction) to “hold” after its 14-per-cent share-price rally in the past three months. However, we maintain our “buy” call on CK as well as UNIQ (Unique Engineering and Construction) given their strong chances of winning major infrastructure projects scheduled for bidding in the second half of 2016 and next year.
This week, the SET Index is expected to be sustained from the US dollar’s depreciation and increases in crude-oil prices.
The dollar’s depreciation came after the less-than-hawkish results of the recent meeting of the US Federal Open Market Committee. In their statement, most FOMC members said they needed to wait for the next US economic indicators before raising interest rates.
Oil prices increased after news of a meeting of producers inside and outside the Organisation of the Petroleum Exporting Countries (Opec) scheduled for September 26-28, and the US dollar’s depreciation. We see the SET Index of 1,550 points and more as a fragile level, given high valuation. Besides, preliminary warning signs have been seen in the futures market after foreign investors were in net-short positions consistently and most were new positions opened, reflecting from higher open interest. The strategy is to slow down investment.
In the overall picture, we started to see signs for upward revision of listed companies’ earnings performance after their second-quarter earnings announcements. Recently, the Bloomberg consensus’ estimated EPS (earnings per share) increased by 1 percentage point from two weeks earlier to Bt94.30 and Bt106.22 for this year and next, respectively. Significant estimated earnings upgrades have been done for the food, energy and retail groups.
For the rest of 3Q16, for big caps, the energy group is expected to outperform the banking sector, given the oil prices. We see signs for downward revision for the banking group continuously, which could pressure their share prices.