Downward trend a chance to buy select stocks

Foreigners were net sellers of Bt6.78 billion during the period on concerns over tapering of US quantitative easing and fears of another Asian currency crisis given recent weak economic data. 

The MSCI AC ex-Japan Index gained 3.65 per cent. Foreign investors registered Bt40 billion net sales in August compared to a Bt603 million net buy position in July. Note that foreigners sold Bt116 billion net worth of Thai equities compared to a Bt76 billion net-buy position for the whole of last year. 

Outperforming sectors in August were petrochemicals, up 1.8 per cent, and energy, off 0.7 per cent. Banking fell 9.8 per cent. Underperformers were building materials, communication, entertainment, transportation, property and food, falling 10-15 per cent.

The National Economic and Social Development Board has revised its GDP growth forecast for this year to 3.8-4.3 per cent from 4.2-5.2 per cent, after second-quarter GDP growth came in at 2.8 per cent year on year versus the consensus estimate of 3.6 per cent. 

Although this can be blamed on the base effect given extraordinary growth in the fourth quarter of 2012 and strong growth in 1Q13, the slowing trends in other Asian economies and lingering negative sentiment will weigh on private sector confidence for at least three to six months. Specifically, consumer lending could remain weak as banks choose to be cautious.

We expect the SET to trade sideways or possibly trend down over the next few months, but this could be an opportunity to buy selected stocks on weakness. Companies that will benefit from the weak baht and whose revenues are the least dependent on domestic consumption include KCE, DELTA and THCOM. On the other hand, TVO will suffer from a weak baht. 

 

Tisco Securities

 

We have trimmed our year-end SET Index target by 8 per cent from 1,550 to 1,420 points (12.3 times price to earnings for 2014), implying mid-single-digit percentage upside from current levels. Amid prevailing funds flow volatility, a SET level of 1,300 based on a historical mean P/E of 11.3 times may serve as near-term downside support.

The current account deficit remains a standout near-term risk to the SET in that upcoming monthly data are likely to remain weak. Note that Tisco’s economic team expects a 2013 current account deficit of US$6 billion or 1.6 per cent of GDP, considerably smaller than estimates for Indonesia (3.6 per cent) and India (4.2 per cent).

Beyond the next one to two quarters, we foresee improvement with the 11-per-cent baht slide, improving purchase managers index in Thailand’s main export destination markets and recovery prospects for the price of natural rubber after a 60-per-cent collapse since 2011. 

Export data should also be boosted by the necessity to increase rice exports to prevent spoilage losses on the government’s unprecedented 17-million-tonne rice stockpile, the value of which stands at a massive 3.4 per cent of GDP.

We recommend a portfolio of energy, banking and property stocks for a combination of pure external exposure plus select domestic exposure providing value, earnings resilience and a degree of beta in the event of a bounce-back in risk sentiment. 

Energy positives include the upward drift in oil prices amid growing geopolitical tensions in the Mideast, buoyant GRMs and petrochemical spreads and exposure to G-3+China recovery prospects. Our top energy picks are PTTEP and TOP.

For banks, we believe asset quality risks have been exaggerated in share prices while analysts have cut earnings forecasts in multiple rounds since first-quarter results. Larger banks’ earnings and return on equity hold up well to stress testing, and valuations have plunged to attractive levels, especially for our key buy ideas – SCB, TMB and TCAP.

For property, we think the 30-per-cent dive in the SET property index now provides a good entry opportunity ahead of a stepped up second-half project launch schedule and ample 2014 backlog. Our sector favourites are LH, QH, AMATA and HEMRAJ.

 

Research Department 

Trinity Securities

 

Cyclicals should continue to outperform during the Syrian impasse.

Last week brought releases of very satisfactory manufacturing figures across the world, including the US, Europe and China. This nailed down our view of the global economic recovery. That could be positive for those sectors depending mainly on external factors, including energy, petrochemical, electronics and tourism. 

Such satisfactory figures also back our view that the Fed will likely start reducing QE3 at the Federal Open Market Committee meeting this month or next month. 

After the Senate Foreign Relations Committee recently voted to authorise the US government to conduct a limited military operation against Syria, such an agenda will be proposed to Congress for consideration today. 

As long as the US attack, if any, is limited and the war in Syria does not spread to other countries, the impact would likely be limited on stock markets across the globe. In a period of Syrian risk, we overweight energy and petrochemical stocks as a hedge for portfolios.

US bond yields continue rising. The 10-year US bond stayed at 2.98 per cent, a record 26-month high. The yield rise came after the disclosure of satisfactory US economic figures including the ISM, which hit a nearly eight-year high, and much-lower-than-expected initial claims for unemployment benefits.

However, we have not seen a sign of improvement for inflation expectations and the risk of another Black Monday – when investors suffered losses in fixed income and sold stocks to offset that – remains low. 

The SET Index is expected to improve in the first half of the month on satisfactory manufacturing figures across the world and Thailand’s House of Representatives tending to approve the Bt2-trillion borrowing bill. 

Our investment strategy is to hold stocks in portfolios and take profits during the resolution process of the bill. We will start cautioning more on the market in the latter half of this month from a discussion on the amnesty bill that could bring chaos outside Parliament. There will also be a risk of US agencies closing their offices at the end of this month if Congress cannot agree on the new budget plan or the introduction of a law for continuing resolution. 

Cyclical and external stocks are our picks – PTT, PTTEP, PTTGC, IVL, BANPU, KCE, HANA, AOT and ERW.