Foreign investors might take profits amid downward pressure on SET

This week is expected to see less of a chance for the SET to rise, while investment risk will heighten due to two indicators.

First is the market’s valuation with the SET at 1,178 points. Technical analysts see this level as the most important resistance level and it is difficult for the SET to break through it. At this level, the current price-to-earnings ratio is as high as 13.74 times. It has been the upper line for the fundamentals of the SET for many years.

Besides, the earnings yield gap – the risk premium for shifting capital from fixed income to equities – declined to 4.27 per cent, lower than the eight-month average of 1.17 per cent, making it less attractive for capital to flow into the capital market. With the limitations of market valuation, the upside for stock prices is likely to be relatively limited.

Second is fund flows. From November 29, when foreign investors began acting as net buyers of Thai stocks, to now, foreign net buying of Thai stocks has reached Bt69 billion, or Bt67 billion, excluding big-lot transactions. We estimate the cost of foreign investors’ stock holding for this round at the SET Index of 1,095 points. At this cost, combined with the baht’s more than 2-per-cent appreciation, foreign investors are likely to reap a return of no less than 8 per cent. With such a likely return, we may see foreign investors starting to take profits.

During this period, the stock market may see the most positive factor as the prices of commodities, particularly crude oil and petrochemical products. From the beginning of this year, the Dubai crude price has averaged US$112 per barrel (Bt3,400), higher than analysts’ estimate of $100 per barrel for financial projection. We, thus, revised up our estimates for PTT, BANPU and PTTEP. The crude price’s volatility is expected and these stock prices’ volatility could follow.

Conclusively, pressure on the stock market will likely overshadow positive factors. Thus, the stock market will likely enter a correction. If investors need to collect stocks in their portfolios, communications stocks like DTAC or food stocks like TUF. CPF or KSL should be weighed.

 

Chaiyaporn Nompitakcharoen

Head of Research

Bualuang Securities

The SET ended last week at 1158.71, down 6.44 points or 0.55 per cent week on week. We believe that the market is likely to face downward pressure this week for the following reasons:

First, with the SET hitting a new high since 1996, its forward valuation has risen to 12.3 times, which is above its long-term average. In the absence of a sudden shock, profit-taking may kick in as the index approaches 1,200.

Second, from a technical standpoint, the SET is trading in overbought territory. Many indicators are near their highs and point to the emergence of negative signs.

Third, the yield gap between long-dated Thai government bonds and SET dividends has recently narrowed. Investors commonly use the yield gap as a guide to timing for portfolio rebalancing. Thus, even though foreign inflows could drive up the Thai stock market further, the yield comparison indicates an increased likelihood of profit-taking.

Based on the above reasons, we expect defensive growth or high dividend stocks may benefit from fund rotation at the expense of the energy and petrochemical sectors. As such, we recommend ADVANC, DTAC, INTUCH and KK.

 

Tisco Securities

Monetary easing by central banks in Europe and Asia is continuing to support the rally in global stock markets. Risk appetite in the Thai market has been bolstered by another cash injection by the European Central Bank, further progress in resolving the Greek debt crisis and a series of earnings upgrades following fourth-quarter 2011 results.

Other positive factors for the SET are the month-to-month improvement in MPI, private investment and consumer spending in January, stronger US economic data and growing expectations that China will avoid a hard landing.

Nonetheless, we anticipate some consolidation in the short term given that the SET has already risen 14 per cent year to date and is now trading at its highest level in nearly 16 years. We also anticipate a slowdown in foreign inflows after foreign investors bought a net total of Bt57.5 billion of Thai equities year to date.

We remain bullish on the banking sector and have upgraded KBANK and BAY from hold to buy due to reduced pressure on their net interest margin and non-performing loans and improvement in their balance sheets. KBANK (high beta play on macro recovery) and SCB (more defensive balance sheet and higher return on assets/return on equity) are our top picks on above-sector earnings growth and superior franchises.

We also recommend using market pullbacks to accumulate selective energy and petrochemical stocks that are benefiting from the rally in global oil prices. The Dubai crude oil price has rallied 16 per cent year to date to above $120 per barrel due to ongoing concerns over crude supply disruptions in the Middle East after Western countries, led by the US and EU, announced economic sanctions against Iran.

According to Tisco’s Economic Strategy Unit, every 10-per-cent rise in the Dubai crude oil price will result in a 50-basis-point increase in Thailand’s headline inflation rate. The ESU also forecasts that if the average Dubai oil price remains above $120 per barrel, Thailand’s 2012 GDP growth will drop by 0.3 percentage point.