SET surges past 1,000 as central banks take action

As a result, the Stock Exchange of Thailand (SET) index climbed above the 1,000-point barrier for the first time in two months. Other external factors supporting the rally were China’s move to free up more bank capital, upbeat US economic data and further moves to resolve the eurozone debt crisis ahead of a key European summit on Friday.

Although the Bank of Thailand only cut its one-day repurchase rate by 25 basis points (bps) to 3.25 per cent (versus our expectation of a 50 bps reduction), we anticipate another 25 bps cut at the central bank’s next policy meeting on January 25. 

Despite the short-term improvement in sentiment, we remain cautious on the market outlook given various global and domestic headwinds. Hence, we maintain our 12-month SET target of 1,000 points, with our top picks as PTTGC, CPALL, CPF, TOP, SCB and ADVANC. Our conservative stance reflects a combination of concerns for key big-cap sectors comprising a majority of the SET by market cap:

Banks: Loan growth has peaked and will decelerate in fiscal 2012. Interest rates are also poised to move lower resulting in net interest margin contraction while credit costs are likely to edge higher. 

Commerce: Slowing farm income growth and likely outright contraction the next one or two quarters will dampen upcountry spending power, a key driver for the sector’s huge outperformance over the past 18 months.

Energy and petrochemicals: Recent downgrades for global GDP growth in 2011 and 2012 imply protracted demand-side weakness for coal, refined product and petrochemicals – the key products for SET index heavyweights in this sector. Note that we are more optimistic on petrochemicals due to the fairly benign outlook for new global supply in 2012-13 as well as potential merger-and-acquisition catalysts for the PTT Group, SCC and IVL.