Outlook positive for third quarter and year

This month we have seen a series of positive economic data coming mainly from the US, comprising non-farm payrolls, advance retail sales and building permits. We expect this trend to run further at least until the end of this month, and it could be one of the main drivers aiding global equities to stand strongly at the current level.

The crude oil price continued its upward trend driven by fundamental factors especially from the supply side. The market is short, with crude oil inventory in the US carrying on its downward trend and crude stocks in Europe still at the lowest level in six years. Speculative flows also stimulated the crude price, as hedge funds built up their net long positions to the highest level in four months.

We expect the SET Index to move sideways up and test the previous high of 1,240 in late August or early September. Supporting factors are the following:

_ Positive surprise from global economic data

_ Declining tail risks in Europe after Germany starts to show support for the ECB sovereign debt purchase programme

_ Upward trend in crude oil price

_ Foreign fund flows into both Thai equity and bond markets

_ The German Constitutional Court is expected to reject the temporary injunction on September 12, thereby permitting the German president to sign into law the ESM and the fiscal pact.

We recommended stocks in cyclical sectors such as energy and petrochemicals, as they are underowned and should benefit from the strong crude oil price. Furthermore, their worst quarter (the second) has already passed and thus their earnings should have positive momentum over the remainder of this year. Our top picks in these sectors are TOP, PTTEP, PTTGC and IVL.

 

KIATKONG DECHO

Head of Retail Research

CIMB Securities (Thailand)

[email protected]  

 

Though listed companies’ earnings dropped 13.6 per cent on-year to Bt344.4 billion in the first half, we remain overweight on the stock market. 

Much of the fall was attributable to the inventory losses of energy and petrochem companies. 

We believe this will reverse in the third quarter as oil prices bounce back. Thus, we reiterate our overweight call on the petrochem sector, as earnings are poised to recover in the third quarter. We still expect the SET Index to end this year at 1,350 points. 

Market catalysts include strong private investment and consumer spending. About 32 per cent of the companies under our coverage reported better-than-expected quarterly results while 33 per cent were in line and 35 per cent lower than expected. We consequently revised down earnings forecasts by 1.3 per cent for this year and 1.6 per cent for next year. Following the revisions, we expect the market to show 22-per-cent core earnings growth this year and 15 per cent next year.

We believe the market will continue to do well on the back of strong private investment and consumer spending. Improved overseas sentiment and strong foreign inflows are likely to support the market.

After selling for several months, foreign investors turned net buyers in July and their appetite is expected to continue. Foreign ownership of the Thai market improved to 26 per cent recently, although still low compared with 34 per cent in 2008. Foreign investors account for about a quarter of the market by trading volume with retail investors making up 53 per cent, local institutions 8 per cent and brokerages’ proprietary trading the remainder.

The Stock Exchange of Thailand’s data showed that in the first half, 447 listed companies suffered a decline in net profits though combined revenue increased by 13.4 per cent to Bt5.06 trillion. Banking, food and beverage, commerce, real estate and medical sectors showed the highest earnings growth. 

In the second quarter alone, their combined sales reached Bt2.55 trillion while earnings fell to Bt130.4 billion due to higher selling and interest expenses. They also showed a combined foreign exchange loss of Bt7.35 billion, against a Bt12.7-billion forex gain in the first quarter.