Market view: Oct 3-7

In the past two weeks, the SET Index has sagged more than 10 per cent, making the Thai market’s valuation more interesting. At a level of 930 points, the price-earnings ratio (P/E) at the end of 2011 was down to 9.79 times from 10.64. The current price-book value ratio (PBV) is at 1.62 times, falling to 1.58 and 1.62 at the end of 2011 and 2012. The dividend yield averages 3.60 per cent this year. The earnings-yield gap, a risk premium for a shift of money from the bond market to the stock market, increased to 5.43 per cent, above the average of 5.39 per cent from 2004 to the present.
These figures indicate that the SET Index is approaching its lowest point since the Asian financial crisis in 1997.
Based on the PER Bands Analysis, in the aftermath of the Tom Yum Kung crisis, the Thai bourse bottomed out three times in terms of P/E at 10 times in 2001, 2003 and 2008. After testing it at a P/E of 10 times, the SET Index was able to turn upward with stability for a long period.
This kind of movement reflects that the index at P/E of 10 times could handle pressures arising from the Thai market well, even during the Hamburger crisis in 2008.
For PBV, the Thai stock market moves in a range of 1.5-2.0 times in normal circumstances. There was only one period in late 2008 when it dropped to 1 time. Thus, the current level of 1.5-1.6 times could be regarded as the lower end and carry weight for pressures that may arise.
The dividend yield rose to 3.60 per cent from below 3 per cent in the previous periods. At this level, return on investment in dividend stocks appears interesting. Holding stocks from now to the scheduled dividend payments in about April 2012, which is about seven months from now, will likely add to the rate of return.
The earnings-yield gap has increased to 5.43 per cent from 4.58 per cent two weeks ago. This is viewed as a risk premium return that is high enough to attract interest from the bond market to the equity market in light of market expectations of a pause in the policy rate.
Based on the above information, ASP Research suggests that current-priced stocks are interesting. Long-term investors are urged to gradually accumulate stocks, as risks to investment have diminished as reflected in the valuation figures.
Short-term profit-taking will likely contain a high level of investment risk, as the SET Index continues its volatility in line with positive and negative sentiment from the problems in Europe and the United States.
High and consistent dividend stocks with strong financial status are advised for long-term investors who need to accumulate stocks. Stock picks are ADVANC with fair value at Bt167 and SCC with fair value at Bt454.

Chanpen Sirithanarattanakul
Head of research
DBS Vickers Securities (Thailand)

The Thai market tumbled in the past two weeks amid heavy selling by foreign investors. Month to date, the Thai market dipped 14.4 per cent, in line with regional peers. Year to date, foreign net selling amounted to Bt38 billion compared to net inflows of Bt38 million in 2009 and Bt102 million in 2010.
Looking forward, DBS has downgraded the Asian equity market’s fourth-quarter outlook as the de-risking trend gains pace amid fears of a worsening global economy and eurozone jitters.
We are also still concerned about the low cash levels in emerging market funds, making them most vulnerable to a US recession or a tail risk event. De-leveraging has yet to be reflected in the current positions.
With the low level of cash holdings, the funds would not have enough fuel to propel markets higher even if risk trades return, except from asset reallocation from bond and money market funds, which is unlikely now amid a period of uncertainty. Investors should brace for more volatility ahead and stay defensive in high-yield plays.
On the local front, we recommend investors focus on domestic plays that would benefit from the government’s populist policies. Our preferred sectors are telecom, property and commerce. The telecom sector offers all the defensive qualities investors seek – recurring income and strong cashflow, solid balance sheet and high dividends. Our top picks for the sector are ADVANC and DTAC.
Property counters should benefit from the government incentives for first-time homebuyers, particularly those companies selling sub-Bt5 million properties and that are ready for transfer by end 2012.
In this sector, we like AP, LPN, LH and SPALI for their expected strong earnings momentum in the second half of this year, and relatively generous dividend yields of 5-6 per cent. The commerce sector should also be a prime beneficiary of populist policies. Our preferred stocks here are BIGC and HMPRO.

Sukit Udomsirikul
Senior vice president for retail strategy
SCB Securities

This week, the stock market is likely to remain volatile on US and Chinese economic figures, which will be announced early this week. In particular, China’s PMI in September is expected to rise to 51.1 points from 50.9 in the previous month. ISM Manufacturing in September for the US is anticipated to be 50.50, the same level in the prior month.
These figures are very important, as they will mirror the economic trend for the rest of this year. If the numbers are better than expected, the stock market could see a chance of recovery.
There are factors to be monitored. These are the ECB meeting, which is likely to discuss more measures, including an interest-rate cut and a new round of quantitative easing, to solve the European debt crisis, and voting for the EFSF, which will proceed further in the countries that have not yet certified the fund.
Domestically, analysts are expected to start launching their research on third-quarter results. The reports on commercial banks will likely come first.
We recommend that investors gradually accumulate banking stocks like KBANK and TISCO.

Vajiralux Sanglerdsillapachai
Executive director
Trinity Securities

Germany’s Lower House of Parliament approved by a 523-85 vote the expansion of the European Financial Stability Facility (EFSF). The EFSF’s current size is €440 billion (Bt18.4 trillion). The bill’s passage will not only enable the EFSF to invest in key markets, but also to inject more capital into the banking sector, allowing it to bolster eurozone countries that are experiencing a financial crisis. This news sent stock prices in Europe skyrocketing.
In the US, real GDP increased at an annual rate of 1.3 per cent in the second quarter, which is higher than the estimate of 1.0 per cent. Initial jobless applications fell to a six-month low at 37,000 last week, which added to the unemployed ranks of 391,000.
Despite these positive factors, Thai equities are still weak and may not recover as fast as foreign stocks.
One of the refineries in Singapore recently closed down indefinitely for repairs due to an accidental fire, but for some reason this news has not been enough to support the advance of Thai refinery stocks.
This confirms our view that Thai equities are weak and investors should be cautious of commodity stocks. You do not necessarily need to buy stocks cheaply to be a winner in the stock market; when you buy them cheap and they don’t go up as you expected, you’ll be worried.
Perhaps the best time to buy is during the beginning of an upcycle, when the market is somewhat more dependable.
In the short run, stocks that you should have in your portfolio during this highly volatile period are those in the ICT, hospital and retailing sectors such as BGH, ADVANC, DTAC, INTUCH, CPALL and HMPRO.