Market View: June 4-8

The market will be driven by two major factors - domestic politics and the euro zone uncertainty which influences foreign fund flows. 

On domestic front, political heat elevated significantly last week following the heated debate on the unity bills. In and out of parliament, there was a strong protest against the House’s votes to move up the debate schedule on the unity bills. The decision to indefinitely delay the debate cooled down the situation to some extent. We believe that from now, political issues would remain another key factor to pressure the market sentiment.

On the eurozone, there is still no clear plan how to end the crisis. The longer this crisis is, the more complicated and severe the consequences could be. Latest development shows that Spain has fallen a victim of confidence crisis, as the country owns a large portion of Greece’s debt. Spain’s central bank had to step in to provide financial supports to Spanish banks. Rumours also went that Spain sought financial supports from the International Monetary Fund, like the other three countries in PIGS (which include Portugal, Ireland and Greece). It is expected that Spain may face a credit rating downgrade and the global economic forecast may be revised soon, as reflected through the slowdown in Chinese and Indian economies. Their first-quarter growth rates were 8.1 per cent and 6.5 per cent, respectively. Thailand’s Business Sentiment Index in April also contracted 14 per cent from the previous month. 

Amid the downside risks, the Thai market is somewhat shielded by the strong growth story of listed companies which reported combined net profits of Bt212 billion in the first quarter, which was close to the historic record of Bt221 billion in the same period last year. The quarterly earnings accounted for 29 per cent of our earning forecast for the entire year. Notably, our earning forecast is quite conservative.

Based on the earning base, the SET index in the next two weeks could somewhat weaken to below 1,100 points. At the current price-earning ratio of 13 times, the index could be in the range of 1,050-1,070 points.  

As the market is in its correction period, investors should be more careful in making their bets. We advise all to maintain cash at 60 per cent of your investment portfolio and invest only 40 per cent in stocks. Good for now are stocks in some sectors like property development, ICT and food. 

 

Tisco Securities

 

In view of the 7.1% SET correction in May and crisis-scenario risks in Europe still elevated, our near-term stance on the Thai market is as follows:

nDe-emphasize pure external-facing sectors where sharp falls in oil prices directly hurt core profits, as well as domestic names where PERs are still in the upper twenties and beyond.

nEmphasize domestic and external names where growth is resilient and valuations are attractive, yet still provide exposure to a market rebound if Eurozone fears ease.

nBy sector, we favour food, telecoms, financials, industrial estates, hospitality/QSR, and contractors. We have added CPF, TUF, STEC and BLA to our top picks list and maintain KBANK, ADVANC, HEMRAJ and MINT. However, we have omitted four previous top picks: PTTGC, PTTEP, SCB and ROBINS.

Barring a crisis scenario, we think our year-end SET target 1,300 pts is still achievable. This implies a market PER of 12.5x for FY13F which is midway between our target price bottom-up valuation of 1,240 and upper threshold level of 1,360 (+1STD above historic mean PER).

Key drivers are the strength of corporate earnings and the economy’s recovery since last year’s floods, relative to expectations. Thailand recently reported 1Q12 GDP growth of 0.3% YoY, easily beating our estimate of 2.8% contraction and market consensus of a 0.5% decline.

Meanwhile we forecast earnings growth of 25% for FY12 and 15% for FY13, driven by the flood base effect and the reduction in corporate income tax.

Key downside risks to our year-end SET target are a disorderly Greek exit from the Eurozone and a worsening of Spain’s banking crisis, with contagion spreading to other countries. Upside risks to our target are a big-bazooka policy response by the EU, possibly in coordination with global central bank measures, and faster than expected monetary easing by China in response to reduced inflation.