Domestic political temperature will have huge impact on direction of Thai bourse

The SET Index fell 4 per cent in the past two weeks to close at 1,359.5 points on November 28, underperforming regional peers (MSCI Asia ex-Japan Index), which fell 3.3 per cent in the same period. 

Foreign investors were net sellers at Bt26.4-billion in the past two weeks, while local institutions and retail investors reported net buying valued at Bt855 million and Bt23.9 billion respectively. 

Leading the falls were stocks in property (-7.2 per cent), transport (-7.0 per cent), tourism (-6.3 per cent), construction materials (-5.6 per cent) and banking (-5.2 per cent). 

Year to date, foreign net selling reached Bt152 billion.

On the domestic front, the growth outlook is not rosy. 

Politics dominate the headlines and will likely remain a major overhang for the economy and the market in the short to medium term if there is no resolution to the political deadlock. 

The situation has been changing daily, making it difficult to predict an outcome and the impact on the economy. 

The only tool for economic stimulus – infrastructure spending – could be further delayed. This uncertainty has prompted the central bank’s Monetary Policy Committee to cut the overnight rate by 25 basis points at its latest meeting and slash its 2014 gross domestic product growth target to 4 per cent from 4.8 per cent, as its previous assumption was premised on disbursements for infrastructure projects kicking off in the first quarter of 2014. 

Externally, there are still fears about tapering of the US quantitative easing programme despite assurances by Janet Yellen, incoming chairwoman of the Federal Reserve, which initially had a positive effect on the market, given her dovish stance. 

Anecdotally, in Thailand, there has been heavy selling of local-currency bonds by foreign investors (Bt57 billion in November, as reported by the Thai Bond Market Association), which has been adding pressure to the heavy outflow from the equity market. 

Meanwhile, a euro-zone recovery remains challenging despite recent positive signs that might have pushed the stock markets ahead of fundamentals. 

And with the surprise 25 basis-point cut in the European Central Bank’s refinance rate already announced in November, headline inflation is still below target. 

The ECB may have to consider alternative non-rate measures to boost the economy. 

 

Tisco Securities

As expected, Prime Minister Yingluck Shinawatra and Interior Minister Charupong Ruangsuwan easily survived the no-confidence motion in Parliament over alleged corruption. 

As for the eventual outcome of the anti-government protests, it could be as “simple” as a speedy dissolution of Parliament and elections being held within 60 days (with Pheu Thai likely returning with a smaller majority).

This would be the best-case scenario for the market, as the political temperature would immediately drop as demonstrators dispersed. 

The worst-case scenario would be violent clashes between protesters and security forces (or red shirts), which could pave the way for a coup (either military or judicial) and a new caretaker government.

The only thing we know for certain is that the Thai economy and stock-market earnings growth will be slower than in recent years of being “juiced” by Thaksinomics and the quantitative easing programmes. 

The Bank of Thailand’s Monetary Policy Committee has clearly recognised the increasing downside risks to economic growth by announcing a surprise cut in its policy rate by 25 basis points to 2.25 per cent. Note that the MPC said it expected to cut its GDP forecasts to 3 per cent for this year and 4 per cent for 2014 (versus 3.7 per cent and 4.8 per cent projected in October).

We believe the winners from lower interest rates and a slower growth outlook will be companies planning property fund/REIT/infrastructure fund issues – where yields may be lower, or simply that the yield makes the issue look more attractive. 

Such companies include CPN (Central Pattana), LH (Land and Houses), QH (Quality Houses), HMPRO (Home Product Center), HEMRAJ (Hemaraj Land and Development), TRUE (True Corp) and JAS (Jasmine International).

We also recommend that investors use market dips to accumulate quality names such as CPALL (CP All), ADVANC (Advanced Info Service), KBANK (Kasikornbank) and TUF (Thai Union Frozen Products, where we have revised up our earnings 

forecasts and target price because of the sharp recovery in its shrimp business).

 

Trinity Securities

Research Department 

 

Based on a study of Trinity Securities from 2005, medium and big caps in SET50 and SET100 usually outperform the market in December. 

Stocks’ returns in SET50 averaged 3.5 per cent in the month. Stocks in SET51-100 had an average return of 3.8 per cent. 

Both groups have provided better returns than non-SET100 stocks, whose returns averaged 1.7 per cent. Such stock outperformance could be explained from LTFs/RMFs (long-term equity and retirement mutual funds) that usually provided the largest amount of investment every December. 

Most fund managers made investments in high-liquidity stocks such as those in SET50 and SET100.

However, such outperformance mostly happened in only a one-month period. 

In January the next year, big caps’ prices mostly declined. In particular, stocks in SET50 provided an average return of -0.6 per cent in January, and this could be explained by redemption of LTFs/RMFs that reached maturity early in the year. If there remains investment in SET50 stocks, investors should sell them before January.

December’s investment strategy: Amid the highly uncertain political situation, we overweight stocks in SET100 that are not vulnerable to local political impacts or that benefit from last week’s cut in the policy rate and depreciation of the baht. Stock picks: CPF (Charoen Pokphand Foods), TUF (Thai Union Frozen Products), KCE (KCE Electronics), STA (Sri Trang Agro-Industry), SCC (Siam Cement), PTTGC (PTT Global Chemical), IVL (Indorama Ventures), TTA (Thoresen Thai Agencies), LH (Land and Houses), QH (Quality Houses) and TISCO (Tisco Financial Group).