SET likely to see slight correction this week

We have found that the valuation gap in terms of forward price to earnings between Thailand and average Asia was closed. Thailand had been trading at a discount of 6 per cent to Asia one month ago.

We believe many stock prices of corporations already reflect resumption of post-flood operations. Some stocks have largely priced in the government’s recovery budget. 

With fourth-quarter market earnings hiccupping from the flooding, the SET’s returns should be capped at somewhere near the 1,000 mark. Furthermore, a sell-off of many risk assets is on. Volatility is increasing, which signifies that the risk is off. It appears that investors have given up on the idea of the EU’s debt solution being resolved quickly. Will a new round of financial contagion start? Maybe, if we take a heavy sell-off in crude oil, gold, as well as high-yield bonds into account. 

Thus, we expect that the SET is going to drop to 950 this week. Our stock picks are CPN, SAMART, KSL, TPC and VNT.

 

 

Tisco Securities

 

Indications that the Bank of Thailand may cut its policy rate at its next MPC meeting on November 30 have helped the SET rise to a seven-week high, albeit on weak volume. Speculation of a rate cut has rekindled buying interest in the battered property sector and other interest-rate plays.

Tisco’s Economic Strategy Unit recently revised up its forecast for economic losses from the floods to Bt200 billion and now expects the central bank to cut its policy rate by 50 basis points this month.

Although an easing in monetary policy should help the economy recover from its worst flooding in 50 years, interest rate cuts will hurt the net interest margin (NIM) of major banks. Our sensitivity analysis shows that every 10 basis-point fall in NIM will reduce earning per share by 5 per cent for BBL, 8 per cent for KTB, 4 per cent for SCB and 6.5 per cent for KBANK. The impact on KTB and KBANK should be greater than on their peers, given their larger proportion of floating rate loans and fixed deposits. 

Meanwhile domestic factors are looking more supportive for the market. Some plants have restarted partial production at flood-hit industrial estates in Ayutthaya after water levels receded, while more news is emerging of post-flood rehabilitation plans. According to press reports, as many as 70-80 per cent of the factories at industrial estates in Ayutthaya and Pathum Thani are expected to be up and running again next month.

One issue to keep an eye on is the Cabinet’s approval of a bill that would grant an amnesty for convicts on His Majesty the King’s birthday next month. The move has been criticised by opposition MPs as being designed to benefit former PM Thaksin Shinawatra and could be the catalyst for a new round of political unrest.

Meanwhile, Europe’s debt crisis is the main external negative factor amid signs that rising borrowing costs are adversely affecting core eurozone members such as France.