Concerns over economy to cap near-term upturn

The MSCI AC ex-Japan Index rose 1.9 per cent. Foreign investors were net buyers in the last two weeks from July 12-24 at Bt4.5 billion, while local institutions and retail investors were net sellers at Bt1.5 billion and Bt6 billion. 

At the macro level, the Bank of Thailand toned down its GDP growth forecast to 4.2 per cent from 5.1 per cent but maintained growth at 5 per cent for next year. Headline inflation for this year was also revised down to 2.3 per cent from 2.7 per cent and core inflation to 1.1 per cent from 1.6 per cent. 

The revisions were in line with the slow global economic recovery due to the softer growth outlook for China and Asia, and weakening domestic demand. We also trimmed our 2013 and 2014 inflation forecasts to 2.4 per cent from 2.9 per cent and 3.5 per cent from 3.7 per cent. 

Price pressures were negligible in the five months ended June and may remain muted as the global economy wallows along. Domestic demand-pull inflation is also unlikely to materialise with delays in the implementation of public infrastructure plans, and headline inflation is likely to hover at 2 per cent for the rest of this year. The central bank may maintain a loose monetary policy with increasing pressure to cut rates, but concerns about rising household debt could reduce the chances. 

Thai banks reported strong second-quarter results with the aggregate net profit of the eight largest banks increasing 6 per cent year on year but decreasing 11 per cent quarter on quarter to Bt46 billion, excluding the gain on the sale of an insurance subsidiary as reported by Thanachart Capital Public Co. There were a few extra items that caused actual results to deviate from our and consensus’ estimates – reversal of the loss impairment charge on assets sold to Thai Asset Management Corporation, and counter-cyclical provisioning. 

Extra items aside, Thai banks’ core operations remained solid. But without economic tailwinds as a result of the delay in infrastructure spending this year and a softer macro outlook, upside may be limited. Therefore, we downgrade the banking sector to neutral from overweight, and focus more on the telecom, tourism and property sectors. 

 

Tisco Securities

The SET’s near-term upside is likely to be capped by concerns over Thailand’s economic slowdown and heightened domestic political tensions. The Bank of Thailand last week cut its 2013 GDP forecast by 0.9 percentage point to 4.2 per cent, making Tisco’s estimate of 4.5 per cent look bullish.

Political temperatures are rising after a new group of government opponents called the “People’s Army” called for a rally on August 4 to protest against the amnesty bill. Tisco’s economic team believes that the government will only deliberate the bill to appease its red-shirt supporters and not really force it through. Besides, market sentiment could be soured by potential hurdles facing the Bt2-trillion infrastructure development loan bill and the Bt350-billion water management project.

On the positive side, there has been a slight improvement in external factors for the market. Stronger euro-area flash purchase managers’ index (PMI) and an improving European Bank Lending Survey helped offset another disappointing China flash manufacturing PMI. A Wall Street Journal article suggests that next week’s Federal Open Market Committee meeting will deliver no tapering of quantitative easing and more reassurances that Fed rate hikes are a distant prospect.

Although market volatility looks set to continue, we maintain our selective buying strategy, particularly in the telecom, healthcare and contractor sectors. Among our top picks are ADVANC, INTUCH, BGH, STEC and CK. 

Note that we have now upgraded CENTEL from hold to buy due to the continued strong momentum of Thailand’s tourism industry – 20-per-cent year-on-year increase in foreign tourist arrivals in the first half  – and the stock’s miserable underperformance over the last few months versus other tourism plays. 

We have also raised our target price of TUF by 4.5 per cent to Bt70 and reaffirmed our “buy” rating. We see a brighter earnings outlook for the seafood producer in the second half given its greater ability to pass on rising tuna costs and a reduction in the EMS shrimp disease.

Banking results are unlikely to help market sentiment. The aggregate second quarter net profit of Thai banks under our coverage rose 17 per cent year on year but was flat quarter on quarter at Bt45.9 billion. The result was below our and consensus forecasts by 3 per cent and 5 per cent. Our top picks in the sector are SCB and TMB. 

 

Research Department

Trinity Securities

Shinzo Abe’s LDP and coalition New Komeito Party won the recent upper house election in Japan for the first time since 2007. We expect this issue to become a trigger point for Japan to push for a proactive economic policy more rapidly. This could benefit Thailand through direct investment and portfolio investment in a form of the yen carry trade.

We see a downward revision of Thailand’s GDP growth forecast. Recently, the central bank revised down its estimate for 2013 Thai growth to 4.2 per cent. Almost all economic figures, including domestic demand and exports, were revised down. However, tourism continues growing with a rising number of foreign tourists. With this, we underweight all stocks related to domestic demand and overweight stocks related to tourism like airports and hotels. 

China’s July Flash Manufacturing PMI at 47.7 was lower than analysts’ expectations and the lowest in 11 months. This signalled China’s continued economic slowdown. China’s 2013 GDP growth is expected to stay at 7.5 per cent or slightly lower. Importantly, we see no chance for China to launch economic stimulus measures soon as its leaders remain satisfied with the country’s growth rate. Thus, those industries related to China’s demand like petrochemical and rubber contain risks in the next periods. 

The Thai stock market dropped late last week on concerns over domestic political issues after the government whips resolved to put the indemnity bill of Worachai Hema up for consideration on August 7. 

We expect a positive direction for foreign capital with net purchases in the bond market. This remains a major reason for our expectation of the SET Index to move sideways up from the rest of this month to early next month to 1,520 points. 

We overweight communications, hotels and electronic parts. We underweight commercial banks, the retail sector and the residential group.