Sentiment on the Thai market has improved in recent weeks. The SET index managed to stay above 1,700 points and seems to be enjoying support from foreign fund inflows that surged over the past few weeks. The momentum is likely to continue, underpinned by positive macro factors.
Firstly, the global economy is clearly improving. The growth of North Asia exports in September has accelerated further, particularly in Korea, Taiwan and Japan, on the back of improving global demand. The major export destinations are China, the US, Europe and Asean. Thai exports also performed better than expected, leading to upward revisions in GDP growth forecasts for the kingdom by leading economists and officials.
Secondly, global investors are becoming increasingly positive on the Thai political outlook as there is now more visibility for the national election path. Besides, the United States’s stance towards Thailand’s military government has softened in the wake of Prime Minister Prayut Chan-o-cha’s recent meeting with President Donald Trump.
From a technical perspective, we see the resistance for the SET index at 1720 and 1730 with the stop-loss level pegged at 1690. Our picks for October are the Erawan Group, Muangthai Leasing, Kasikornbank, PTT Global Chemical and Tisco Financial Group.
Thailand’s economic fundamentals continue to improve: in particular the recent increase in industrial capacity utilisation (from 60 per cent at the end of 2016 to 63 per cent in August), and the continued decrease in household debt to GDP from a high of 81.2 per cent in the fourth quarter 2015 to 78.4 per cent in August). The BOT recently raised its GDP forecast for 2017 to 3.8 per cent, which basically means they see greater than 4 per cent growth in the third or fourth quarter. Add to this the prime minister’s recent assertion that elections will be held in November 2018. and it’s no surprise that the market has broken through the 1,700 barrier.
In the past few days we’ve seen big moves in “upcountry” plays (companies with large exposure to the provinces) such as Robins, M, Global and BJC. The market is being driven not just by the improving economy – there’s also the expectation of pre-election largesse from the government and political parties in 2018. Many investors also believe that the return to democracy will see foreign direct investment (FDI) return to Thailand, particularly if the EEC bill gets passed (meaning massive tax breaks and cutting of red tape).
Although the market appears to already be looking ahead to 2018 (and in some cases to 2019), we think third-quarter 2017 results could still turn out to be rather important. Any information – good or bad – gleaned then could end up being used to gauge earnings growth momentum going into 2018. We think this is critical given that, according to Bloomberg, the market is expecting SET EPS to grow 10 per cent in 2018 (versus 7.5 per cent in 2017).
We continue to prefer companies that have a strong earnings outlook in the secon hlaf od this year and first half of 2018. We have removed AOT (up 49 per cent year-to-date versus 11 per cent for SET) from our top picks to reduce our exposure to “event play” risks, and have instead added Mint and Centel to reflect the brighter outlook for tourism and their QSR businesses. We also like SCC, the biggest laggard among big cap stocks this year, and have upgraded our rating on LH to “buy” after revising up our 2017 net profit forecast for the developer by 10 per cent to reflect first-half asset sale gains.
Based on our study on the last two elections (2011, 2014), the SET Index outperformed in periods close to an election (one month before) and thereafter – a so-called election rally.
In this environment after the announcement of a likely election schedule in November 2018, winners will be industrial estates with estimated FDI increase following higher confidence for Thailand and the EEC development as a flagship to drive the Thai economy.
In the 2007 election, these industrial estate stocks obviously outperformed the SET Index during the year before the election, following the petrochemical and energy groups. We overweight these stocks in the long term.
We are not bullish about the prime minister’s recent interview on the next election schedule as it was planned earlier. Our study indicates that the election rally on Thai stock market occurs in the periods close to an election and thereafter.
These expected moves are in line with foreign investors who have opened short positions of 13,000 new contracts. We continue with a selective investment strategy and prefer industrial estates in the year going forward as some foreign investors will likely gain confidence.