Monetary easing talk at the forefront of market volatility

Local institutional investors were the only net sellers in the past two weeks, dumping Bt7.8 billion compared to net buying by foreign investors of Bt3.2 billion, local retail investors of Bt2.4 billion and brokers’ portfolio of Bt2.1 billion. 

At the macro level, the Bank of Thailand kept the policy rate at 2.50 per cent, citing weak global growth’s effect on imports and domestic consumption. 

The medium-term outlook for the Thai economy depends on three factors – execution of infrastructure projects, domestic demand growth and the recovery of external demand. 

Given minimal price pressures and likely continuing fiscal stimulus and the low policy rate, consumption should be supported. The external sector is unlikely to blow headwinds or tailwinds in the coming months given moderate growth in global demand. 

That said, we maintain our view that the benchmark rate should remain stable until the second quarter of 2013, when we expect the rate to rise by 25 basis points. Meanwhile, we have revised down our gross domestic product (GDP) forecast to 4.6 per cent from 5.0 per cent.

Thai banks will be reporting second-quarter results over the next two weeks. Despite the weak macro outlook in the second quarter, we expect the eight largest Thai banks to report solid earnings of about Bt50 billion, up 15 per cent on year. Loan growth was mixed up to May 13, with the eight largest banks reporting 3.3-per-cent expansion year-to-date, driven by small and medium-sized enterprise (SME) and retail lending. 

Several banks cited corporate loan repayments as the major culprit of flat loan growth. We saw a jump in corporate loans at major banks, while retail-centric banks will likely report weaker loans compared to the first quarter as domestic consumption wanes. There could be a downside to earnings from extra provisions, but this should not affect our earnings estimate at this point. 

 

Tisco Securities 

As we anticipated two weeks ago, the SET remains volatile, dropping 100 points from its July 2 high to its July 10 low, before spiking to close up 58 points in trading the following day. External factors, particularly the state of China’s economy and guidance from the US Fed, are the primary forces driving the fluctuations, in our view. 

Foreign investors, meanwhile, have staged a cautious return to the Thai market, with net buys seen for three of the last five trading days.

Fed Chairman Ben Bernanke’s July 10 comment that an accommodative monetary policy will be needed for “the foreseeable future” has served to calm fears and reinvigorate global markets. Adding to the bullishness were signals that China’s government may be amenable to some degree of economic stimulation. However, with credit/liquidity/growth concerns still casting a shadow over China, and minutes from the last Fed Monetary Policy Committee meeting indicating genuinely mixed sentiment among the voting members regarding quantitative easing (QE) tapering, we believe the underpinnings of this recent market rebound remain shaky.

We continue to recommend a selective strategy for the SET, favouring stocks that are better shielded from market volatility and offer long-term value. 

On the energy front, we remain positive on TOP, as we expect the company’s refining margins to widen from the lower feedstock premium. We also like PTTEP for its volume expansion prospects and steadily improving balance sheet. 

Looking at banks, we expect core earnings growth to moderate this year to 11 per cent and maintain our “Buy” ratings for SCB (secured high profitability and superior balance sheet quality), TMB (prudent balance sheet buffers and a mergers-and-acquisition target) and TCAP (improving balance sheet buffers and attractive valuation).

Despite being beat up by equity outflows the past couple months, the Thai commercial sector’s long-term growth story remains intact, in our view. We do expect middle-class purchasing power to dip in line with softer economic data over the next few quarters, tightening domestic consumption. 

However, we believe CPALL and HMPRO are well positioned versus peers to weather the short-term consumption slowdown and capitalise on Thailand’s long-term structural and macro development. With valuations at enticing levels, we upgrade CPALL and HMPRO to “Buy”. Our other top picks at current levels are AOT, BGH, STEC and ADVANC/INTUCH.

 

Research Department

Trinity Securities

 

Last week, stock markets across the world rose after US Federal Reserve Chairman Ben Bernanke said the current employment figure is better than reality and accommodative monetary policy will be needed to continue. We see Bernanke trying to temporarily soothe investors. We expect a clearer timing of QE’s tapering/ending in Bernanke’s testimony to the US Congress on Wednesday and Thursday.

The Bank of Thailand’s Monetary Policy Committee unanimously decided to keep the policy rate unchanged at 2.50 per cent. The monetary authority forecast the country’s economic slowdown with growth of less than 5 per cent this year. This year’s growth had been estimated at 5.1 per cent. This is in line with our 2013 growth estimate of 4.5 per cent. 

Risks to growth include slower domestic demand in both private consumption and private investment, and exports, which will likely experience an impact from China’s economic slowdown. Therefore, we underweight stocks related to domestic demand. These include commercial banks, retailers and property companies.

The SET Index is expected to start moving sideways up in the latter half of this month. The gauge is targeted at 1,520 points in August on the back of the yen carry trade which may occur if Japanese Prime Minister Shinzo Abe’s Liberal Democratic Party gains the majority in Japan’s upper house on July 21.

We suggest a selective strategy and overweight the energy sector (PTT) and communications sector (ADVANC). The energy sector links to the global recovery with cheaper valuations than in the past. Its forward price-earnings ratio is now at 9.6 times, lower than the past average of 9.7 times and Asia’s energy-sector average of 10.6 times.

Hotels are another attractive sector, since tourist arrivals have been growing robustly this year.