SET likely to be weighed down by weak sentiment

The MSCI AC ex-Japan Index also fell 1.73 per cent. Foreign investors’ net selling reached Bt28.6 billion during July 8-22, while local institutions and retail investors were net buyers at Bt7.4 billion and Bt24.8 billion, respectively.

Thailand’s net equity funds outflows is the second largest year to date ($3.3 billion) among Asian markets after South Korea ($6.4 billion), causing the baht to depreciate by 5 per cent year to date. 

At the macro level, the National Economic and Social Development Board (NESDB) has revised down its GDP growth forecast for this year to 3.8-4.3 per cent from 4.2-5.2 per cent, after second-quarter growth came in at 2.8 per cent year on year versus consensus estimate of 3.6 per cent; the pace is much slower compared to the 5.4 per cent recorded in the first quarter. As a result, the Monetary Policy Committee voted to keep the benchmark rate at 2.5 per cent on Wednesday, in line with market expectations. 

Although the weaker GDP growth can be blamed on the base effect given extraordinary growth in the fourth quarter and strong first quarter growth, slowing trends in other Asian economies and lingering negative sentiment will weigh on private sector confidence for at least 3-6 months, in our view. 

We still see downside risk for the SET Index over the next few months, but this could be a good opportunity to “Buy” on weakness. Stocks that will benefit from the weak baht, and whose revenues are not dependent on domestic consumption include KCE, DELTA and THCOM. 

On the other hand, THAI and TVO will suffer from a weak baht. 

 

Chaiyaporn Nompitakcharoen

Head of Tactical Research

Bualuang Securities

 

The SET dropped sharply last week as the Thai GDP data released was below the consensus estimate. 

Corporate earnings continued a downward trajectory. Aggregate net profit rose 24 per cent year on year, but dropped 30 per cent quarter on quarter. The quarterly drop is partly due to foreign exchange losses and extraordinary transactions. However, released earnings fell 6.4 per cent short of the consensus estimate. That shortfall prompted analysts to pare back 2013 forecasts again. The consensus forecast for the SET100 has declined almost 6 per cent during the last two months. The Thai government tabled its fiscal-year 2014 budget bill in Parliament last week. The debate has taken longer than the market expected. However, the outcome of the debate is a foregone conclusion – the Pheu Thai Party and its allies will vote it through with an overwhelming majority. But the outcomes of other issues aren’t so clear, such as the amnesty bill, which the opposition Democrat Party is working with anti-Thaksin Shinawatra groups to try to derail. 

We expect that the SET is likely to fall back below 1300. The MACD indicator, which is used to measure momentum, indicates that the Thai bourse remains in bearish mode. The MACD has not confirmed a trend reversal. There is also a new risk in that global equity market volatility is projected to surge again, which would mean wider swings for indices across the world. That would not be good for the Thai stock market during a period of weak economic data and corporate earnings growth. Our Risk-to-Reward Ratio suggests that investors should stay on the sideline in the stock market to protect against downside surprise risks tied to economic data. 

The SET’s forward price to earnings ratio (PER) of 13 times is not expensive, but neither does it present a compelling buy story. Therefore, we maintain our defensive stance.

 

Tisco Securities

 

The market has moved into oversold territory after plunging 7.4 per cent in a six-day losing streak (as of Thursday). This brings the SET’s losses since its Wednesday peak of 1,643 to 290 points or 18 per cent.

Although we anticipate a short-term rebound, aided by better-than-expected Chinese and Europe flash purchase managers index (PMI) reports, the baht’s fall to a three-year low against the dollar means that foreign funds are likely to extend their selling spree of Thai equities. Note that during August 19-22, foreigners were net sellers of a massive Bt24.3 billion, bringing their cumulative net sales for 2013 to more than Bt110 billion. Despite the risk of further downside, we believe the market is starting to offer compelling value. An overshoot to below the 1,300 level would represent a good opportunity for medium-term investors, in our view, as this would put the SET on an inexpensive 2014 PER of 11x. 

The three sectors we like the most at current valuations are banks, energy and property. The finance minister’s decision to allow the Mitsubishi UFJ Financial Group to buy up to 75 per cent of Bank of Ayudhya is positive news for the banking sector and is likely to spur fresh speculative interest in other merger and acquisition targets such as TMB. 

For the overall sector, we maintain our view of a slowing earnings growth cycle and forecast 16-11 per cent core profit growth in 2013-15 (vs 20-28 per cent in 2010-12) due to a reduction in loan demand and a thinner loan margin. Nonetheless, we believe that with the sector’s average valuations of 1.4x price to book value (post-2008 average) and 9x PER (-1STD) for 2014F, the market has already discounted the less attractive outlook for the Thai banking industry. 

 

Research Department 

Trinity Securities

 

China and the euro zone reported much better-than-expected Flash PMI figures. China’s Flash PMI was at 50.1, above the 50-level for the first time in four months. This reading means expansion. It was also two consecutive months for the euro zone’s PMI to stay above 50. This clearly nails our aspect that the global economy gives a signal for continuous recovery. Importantly, China’s PMI turned around this month, likely indicating China’s has passed through its worst. 

We continue to focus on stocks linked to the global economic recovery. Such stocks are in the energy and petrochemical sectors. Stocks that gain from the baht depreciation are also included. Those are tourism and parts. 

The baht weakened to a record since July 2012. The baht was at 31.9 per US dollar. We maintain our forecast that the baht would be pressured by the US dollar appreciation after the US economic recovery for the rest of this year.

Trinity Securities gathered the earnings of all sectors combined at the end of the second quarter and made comparison with analysts’ estimates. Listed companies’ net profit in total rose only 3.8 per cent year on year in the first half of this year. It was very low. Analysts projected a 20.7-per-cent increase in net profit for 2013. With this, we believe analysts’ estimated earnings cut may not end yet. There are sectors that saw much-lower-than-expected profit growth for the first half of this year and have high possibility for further estimated 2013 earnings cut. Such sectors are food, commercial banks, securities. Those with much-higher-than expected growth for the first six months may see high chance for upward revision of profit estimates. They are hotel, property, transportation and electronics.

We expect investment sentiment to improve this week thanks to estimated positive export figures in July and the Thailand Focus seminar  scheduled from August 28-30. The seminar is expected to generate interest among foreign investors after the SET Index dropped to levels that offer attractive valuation. 

We anticipate the SET Index at lower than 1,365 points as attractive. Based on the forward price to earnings of 11.5 times in the past and the SET’s earnings per share at the end of 2014, we overweight cyclical and external stocks and underweight domestic stocks.