Market ends year on quiet note as confidence sinks in euro zone

Particularly disturbing was the historically high deposits placed by European banks in the European Central Bank, reflecting their reluctance to purchase bonds issued by troubled countries in the euro zone. This went against the ECB’s intentions and mirrored the European banks’ lack of confidence in extending loans to each other.

We expect this issue to pressure the stock market until the first quarter of 2012, as there is a colossal amount of debt to be auctioned off in Europe. This debt is not only from Italy and Spain, but also from the ECB. The current situation does not make it easy to auction bonds. 

Besides that, the likely sharp economic contraction in the fourth quarter of 2011 could drag listed companies’ profits down lower than expected. Other issues include the planned amendment of the Constitution. 

We expect the SET Index to make a correction early this year. Some rebounds are likely early this month on expectations of foreigners’ buying spree. Foreign investors sold more Thai stocks than they bought during the past two months.

However, we suggest investors be cautious and invest only for speculation. 

Technically, if the SET falls below 1,006 points, that rings an alarm.

Speculation should be focused on KTB, SCB, BBL and KK, investment stocks like KSL, CPF, HMPRO, TPC and BCP, and high-dividend stocks like TTW, BAFS, CPF, KK, INTUCH, EGCO, MAKRO and ASP.

Last week, stocks rose on good news about the euro zone debt problem, speculation on the G-20 meeting result and listed companies’ earnings performance. However, the European economy remains at risk of a recession. It is still weakening. Major economies like the US and China are slowing. There is medium-term market risk with limited upside. 

The Thai market has positive momentum with a chance to test 973 or 985 points this week.

We suggest investors gradually reduce their investment portfolio due to the persistent medium-term risks and less good news after the resolution of the euro-zone debt problem.

Speculation can be made on stocks without vulnerability to the flooding and Europe’s debt problems, such as ADVANC, CPF, HMPRO, SCCC, DCC, TASCO, VNG and TTCL.

 

Tisco Securities

 

The near-term outlook for the SET remains lacklustre due to continuing concerns over the euro-zone debt crisis and uncertainty over how quickly the Thai economy can recover from the devastating floods in the fourth quarter of last year.

Investor sentiment turned more cautious after it was revealed that Thailand’s Manufacturing Production Index for November, the peak of the flood crisis, tumbled 48.6 per cent year on year. The figure deteriorated from a 30.1-per-cent decline in October and fell below the market consensus of a drop of 39.1 per cent. The industrial capacity utilisation rate also marked a new low of 40.1 per cent.

The worse-than-expected data have prompted us to cut our 2011 GDP growth forecasts for the fourth quarter and full year to a 6.0-per-cent contraction and 0.8 per cent, down from a 1.7-per-cent contraction and 1.9 per cent.

However, we maintain our 2012 GDP forecast at 4.5 per cent and anticipate a strong rebound in domestic demand, aided by government policies aimed at stimulating consumption. Post-flood reconstruction activities should also give a boost to private investment. 

The SET is currently trading at an undemanding 2012-forward price-earnings ratio of 10.5 times, which is slightly higher than the regional average multiple of 9.6, based on DB Asia data. If the SET were to trade at its historical average P/E of 11.6, this would imply a valuation of 1,100 points.

Although Europe’s problems have heightened global risk aversion, we see some positive external factors that should improve sentiment in the Thai market in 2012. These include early signs of recovery in the US economy and a loosening of monetary policy in China after two years of tightening.

Energy and petrochemical stocks are the purest plays on a global demand recovery and we remain overweight on this sector. Other sectors that we expect to outperform this year are contractors, as they have record backlogs and new infrastructure projects have been announced, as well as industrial estates, as land sale prospects for leading listed operators remain promising despite the floods.