Investors dumping equities for bonds amid global meltdown

The Thai market plunged 5 per cent from its recent peak of 1,600 points to 1,520 mid Friday. The broad global MSCI All Country World Index, a benchmark for global equities, plunged 8 per cent last month. 

Apparently, investors were disappointed with the slowing world economy, as many advanced economies have been reporting weak numbers. The most worrying is Europe, where leading economies like Germany and France are not immune to the slowdown and deflation. 

Sanction games with Russia will add to the troubles, and there is increasing risk of the EU economy falling into the doldrums. The US economy is not much better. Its recovery pace is still fragile and needs more care. Slowing growth is also seen in Japan and China.

In Thailand, the SET Index is close to its fair value for this year. Corporate results will be coming out in a few weeks. 

The banking sector’s performance is not great as loan growth has been mild, and we may not see acceleration until next year. The only positive factor is perhaps expanding net interest margins led by lower funding costs. 

Sectors that should report solid earnings growth are property and selective exporters in electronics and food. Overall, third-quarter results are not expected to be spectacular.

Going forward, the immediate risk is Ebola. If it is not contained, it could interrupt business and leisure travellers alike. This would deal another blow to the slowing global economy. 

We recommend investors stick with stocks offering clear earnings visibility. We like TMB Bank because it is on track to get a higher rating, supported by improving ROE and better asset quality. 

Siam Cement is positioning itself to be a leading Asean player, driven by capacity and expansion. KCE Electronics will be riding growth in the coming years led by its capacity expansion programme, and we expect high revenues in the third quarter. Thai Union Frozen Product is strengthening its foothold in the global food market by going on an acquisition spree.

 

Tisco Securities

Thai stocks face further selling pressure in the near term due to rising risk aversion and high volatility in global financial markets. Growing concerns about US and EU economic outlooks have hit stock markets across the world, prompting many to pare back equity portfolios and switch to safe fixed-income instruments.

The SET has only fallen about 5 per cent from its recent peak of 1,600, with the market’s decline partly cushioned by year-end LTF/RMF buying. But Thai equity valuations are not particularly cheap, with the SET trading at 2014-15F P/Es of 14.7 times and 12.8 respectively. On a P/B basis, the market is now trading 13 per cent above its historic average.

Meanwhile, third-quarter earnings season got off to a positive start with TMB Bank reporting a net profit of Bt2.39 billion, beating both our and consensus forecasts by 7 per cent on lower-than-expected funding/credit costs. 

TMB remains our banking analyst’s top pick and she believes we could see another round of street forecast upgrades following its strong third-quarter performance.

We have also initiated coverage of two domestic consumer plays with a “buy” rating. The first is AEONTS, a non-bank financial stock that is capitalising on the growing financial needs of Thailand’s upcountry population and capturing market share as commercial banks tighten up lending. After three straight quarters of earnings contractions, AEONTS posted a 15-per-cent QoQ net profit jump in 2QFY14. We believe earnings have now bottomed out and are forecasting 25-per-cent net profit growth in FY15.

The other newcomer is food and warehouse player SST, which bought restaurant and fashion brand Grey-hound last July in a deal worth Bt1.85 billion. SST should see a significant extra gain from the spin-off of its loss-making cooking-oil business in the third quarter. We forecast a 710-per-cent spike in next year’snormalised profit to Bt189 million on the back of a turnaround in its brand name business and expansion of  Greyhound. 

 

Research Department

Trinity Securities

Late last week, we weighed the most on chairman of the St Louis Fed James Bullard’s statement in an interview. He said the Fed should decide to postpone the end of its QE programme from the end of this month due to a sharp drop in inflation expectations – recently, the figure fell to the lowest since October 2011 – although we don’t believe the end of QE will be postponed from the end of this month. 

We believe that such low inflation expectations and weak global economic momentum now will be major reasons for the Fed not to take any action that will surprise markets in the FOMC meeting from October 28-29. With this, the risk that we expect the Fed may signal for more tightening is down significantly.

Although stock markets across the globe will drop in this period, the SET Index will take downside risks at only 1,500 points, given foreign investors’ current holding of Thai stocks at a nearly record low in five years at about Bt30 billion-Bt35 billion, LTF/RMF capital that is waiting for flowing in and upward revision of forecasts for listed companies’ earnings.

Investors should start accumulating stocks when the SET Index moves to 1,520 points or close to that level. Our stock picks are big caps with limited downside risks like ADVANC, INTUCH, PTTGC and PTTEP. We think the same that the SET Index at 1,500 points is the worst in this round. 

Big caps are starting to look more attractive as a safe haven. Look at this year’s big caps’ (SET50) performance – they underperformed the market in both uplegs and downlegs. This and the low level of foreign holding in Thai stocks makes us see limited downside risks for stock prices of this group.