Watch for baht 'solutions'

The baht has been appreciating consistently by 20.66 per cent from 36.30 per US dollar on March 3, 2009 to 28.80 per dollar at the present. The Thai currency significantly strengthened from mid-March 2013 to the present due mainly to capital flows. From 2009 since QE1, net foreign accumulated  purchase of Thai equities was worth Bt2.27 trillion. Over Bt180 billion worth of capital net bought Thai stocks and about Bt959 billion went for foreign direct investment. Such excluded trade surplus.  

Such currency appreciation began to cause difficulties for the Thai exports. From 2009, Thailand’s trade surplus (baht term) declined continuously. In 2009, trade account was in a surplus of Bt1.12 trillion, while 2012 saw a trade surplus of only Bt261 billion. This year, pressure for a likely trade deficit begins. 

Thus, Bank of Thailand has to speed up its solutions. There are two possible solutions. First is to slash the policy rate to narrow a gap of Thai rate and rates in other countries. This could discourage capital inflows into Thailand. The second is to introduce measures to discourage capital at severe level and less. Impacts from the likely solutions are needed to be assessed for investors.

The rate cut is expected to give positive sentiment for the  SET Index, provided it as a natural solution, which may not make investors panicked. This may widen Earning Yield Gap (Market Earning Yield – Bond Yield 1 Year = Market Risk Premium) and give opportunity for capital to flow more into the stock market and risky assets. Based on a preliminary calculation, it is found that if the rate is cut by 25 basis points, the SET Index will need to surge by 70 points to maintain the Earning Yield Gap at the same level.  (In the reality, the SET Index may not rise that much as the Current PER of the Thai bourse is higher than 17 times.). However, this solution may accelerate bubbles of risky assets.

Another way, measures to curb capital inflows are unnatural and their impacts depend on the level of severance. The clear result could be seen to weaken the baht but price reduction of assets could also happen. There must be direction to supervise foreign capital (excluding FDI for industries), particularly those flowing into the Thai stock and bond markets.

This week, the SET Index is expected to move in a range of 1,550 – 1,600 points. Trading is suggested in groups with positive factors. Retail group  is advised for a major merger of CPALL and  MAKRO. Construction group  is attractive for the government’s mega investment. Stock picks are CK and  UNIQ. Residential project developers may face speculation on the rate direction. Stock picks are SIRI, RML and AP.

 

Kitpon Pripisankit

Strategist

Kasikorn Securities

The SET Index exceeded 1,550 points last Monday after G20 and IMF meeting provided support for BOJ’s monetary easing. More capital is expected to pour into risky assets. 

The SET Index faced profit taking and volatility on concerns over the Bank of Thailand’s likely capital control measures to slow the pace of the baht  in the middle of  last week. After the discussion among the BOT, MOF and related agencies, no measures were introduced to curb foreign capital inflows, prompting the SET to rise late last week and closed at its one-month high at  1,582.93 points.

Next week, we expect the SET Index to move sideways for Q1-13 US GDP figure to be announced last Friday. Late this week, the SET Index could confront short-term profit taking after the ECB meeting on May 2. We forecast sell on fact if the ECB cuts the benchmark rate. If the ECB keeps the rate unchanged at 0.75 per cent, we may see selling spree in risky assets and commodities. However, we remain positive towards the SET Index in the medium to long term on the momentum of the global economic recovery.

Investment strategy: the SET Index has a chance to test 1600+/-. We suggest investors to pick stocks with cheap valuations, likely good or better earnings performance in 1H13 and possible upward revision of earnings estimates. Stock picks: TCAP, BAY, TK, PTTGC, AP, MK, KCE, CCET, DELTA, MAJOR, and NMG. Gradual accumulate turnaround stocks for medium term investment. These include CPF, TUF, THAI, TTA and TRUE.