Fiscal cliff will put further pressure on stock markets

Stock markets across the world rose last week on expectations of China’s additional economic stimulus and possible swift solutions to the US fiscal cliff.

We expect China to introduce its economic stimulus package, but not this year. Now, China’s economic figures continue to show signs of recovery. We expect more stimuli next year, when China will see its economy slow down.

We expect “fiscal cliff” risks to accelerate the rest of this month. It will become a major factor to pull down stock markets across the world, including Thailand’s, for the rest of December.

We see two risk issues for the fiscal cliff. One is political chaos in the United States, as the negotiations over the new tax law in Congress may take time and be prolonged. In the past, stock investors did not like delayed negotiations and mostly sold stocks off in the initial period. 

The other is that although the negotiations will finally reach reconciliation, probably in the last week of 2012, through the extension of some tax relief, we expect no extension of the capital-gains and dividend taxes. With this expectation, US investors may sell off stocks this month to avoid the probable additional tax burden if they hold stocks and sell them next year.

Importantly, we are starting to see the difference in the solutions for the fiscal cliff as proposed by the Democrats and the Republicans. The Republicans’ latest offers are the following – a budget cut of more than US$1.4 trillion (Bt43 trillion) and more tax collection of only $800 billion. These offers differ greatly from those of President Barack Obama and the Democrats. They are an additional tax collection of $1.6 trillion and an increase in the government budget of $50 billion. 

We expect the different positions of the Democrats and the Republicans over planned solutions for the fiscal cliff to prolong negotiations in Congress. It will be a major issue to pressure stock markets this month. 

Our suggestion is to hold 70-80 per cent of portfolios in cash and invest 20-30 per cent in stocks during the period. The SET Index will likely peak in the first week of this month and continue sideways down after that.

 

KIATKONG DECHO

Head of retail research

CIMB Securities (Thailand)

Although no one is brave enough to forecast the final result of the US “fiscal cliff” negotiations, stock markets will likely rise consistently to the end of this year or the first week of next year if the result comes out positive.

However, if there is no progress and the talks are postponed to the point that the tax increases and budget reduction automatically kick in at the beginning of 2013, stock markets will plunge dramatically. 

We should keep a watch on the results of the negotiations, which are expected to come out before Christmas. Now, many signs seem to be on hold and come out positive. The AAII (American Association of Individual Investors) survey indicates bullishness or VIX (Chicago Board Options Exchange Market Volatility Index) remains very low. 

If a solution is found this month, we recommend “hold” or “buy” on economic-cycle stocks such as energy, banks and food. If there is no progress and it tends to become automatic budget cuts and tax increases or the bargaining is pushed into next year, we suggest “sell”. This is because the US economy will then likely see a sharp contraction in the first half-year. That could mean US stock-market volatility.

This week, the SET Index is expected to continue rising to test 1,360-1,370 points on expectation of the US Federal Reserve’s announcement to purchase a new round of Treasuries at the Federal Open Market Committee meeting of today and tomorrow and an earlier-than-forecast result from the fiscal-cliff negotiations. If both outcomes are positive, it is possible to see the SET climbing to nearly 1,400+/- points in the first half of January.

 

CHANPEN SIRITHANARATTANAKUL

Head of research

DBS Vickers Securities (Thailand)

The SET Index rose 4.5 per cent in the last two weeks against regional peers’ 2.2 per cent, led by the telecom, petrochemical, property and banking sectors. Our 12-month SET target is 1,461 based on a bottoms-up approach and implies a 12.9-times FY13F P/E.

November inflation eased to 2.7 per cent year on year, well below the 3.3 per cent registered in October and the 3.2-per-cent consensus estimate, partly thanks to price controls on fresh food and a cut in the corporate tax rate that helped to dilute the trickle-down effect of higher costs.

We expect inflation to inch up to 3.7 per cent in 2013 as the government expands the minimum-wage increase to 70 provinces and accelerates infrastructure spending. 

There was a positive development in the telecom sector last week when the Administrative Court dismissed a petition for an injunction against the awarding of licences for third-generation cellular service, which helped to raise stock prices of major operators temporarily.

We expect the National Broadcasting and Telecommunications Commission to issue 3G licences to the three winners of October’s spectrum auction – Advanced Info Service (ADVANC), Total Access Communication (DTAC) and True – soon. We reiterate our “buy” calls for ADVANC and DTAC, while Intouch (INTUCH) remains our top pick.

Our top picks for the month include Kasikornbank (KBANK) and Minor International (MINT) among large caps. For small caps, we favour Asian Property Development (AP), Ch Karnchang (CK), Jasmine International (JAS) and Pruksa Real Estate (PS) because of strong earnings momentum.