SET recovers somewhat despite lack of positive drivers

The stocks that led the gain were Airports of Thailand (AOT), Kasikornbank (KBANK), CP All (CPALL), PTT Global Chemical (PTTGC), and Central Pattana (CPN). The laggards were PTT, Siam Cement (SCC), Bank of Ayudhya (BAY), CP Food (CPF), and Siam Makro (MAKRO). 

The Stock Exchange of Thailand has been moving within a tight range because of a lack of positive drivers in a sluggish economy. 

Foreign investors were net sellers at Bt9.3 billion in the last two weeks, taking their total net-selling position to Bt15.3 billion to date. 

DBS Bank economists recently cut their 2015 GDP growth forecast for Thailand for the second time in five months, looking at 3.2 per cent now, from 3.6 per cent previously. Exports have also been flat with downside risk on a full-year basis. The weaker baht might help to lift exports (and possibly profit margins), but that may not be sufficient to offset the impact of the slow Thai economy, according to DBS Bank. 

Domestic demand will not improve despite the Bank of Thailand cutting the policy interest rate, as households continue to de-leverage. 

All the other economic engines are also running at a slow pace, and are unlikely to deliver any upside surprises.

The external environment is also not supportive of the Thai stock market. The outlook for emerging markets remains cloudy, as they are still vulnerable to the currency war among developed peers. The real business sectors have been hit hard by extreme currency fluctuations, on top of weak global demand, especially from Thailand’s major trading partners (the United States, the euro zone and Japan). In the end, the weaker baht might not result in better margins for exporters, as buyers will negotiate for some of the gains. 

Moreover, the MSCI and FTSE are about to increase China stock weightings in their key indices this year, which could mean a reduction in the weighting of Thai stocks. The impending global portfolio adjustments could deliver another blow to the SET.

We continue to encourage investors to diversify their portfolios to overseas markets. The China market is expected to continue to deliver superior growth, above Thailand’s at least in the next few years. But the rally of A-shares in the last two months could be a sign the Chinese markets are overheated. 

We recommend that investors increase the weighting of cheaper H-shares in Hong Kong; H-shares are on average 22 per cent cheaper than their A-share counterparts. Investors could consider increasing exposure to H-shares by buying ETFs (exchange-traded funds) in the Hong Kong market, such as the Hang Seng H-share Index ETF (2828HK).

 

Tisco Securities

As expected, the central bank’s Monetary Policy Committee left its policy rate unchanged last week, easing concerns about an additional net interest-margin squeeze for commercial banks. The MPC believes that the two consecutive rate cuts this year and recent baht weakness have eased monetary conditions. With a gradual economic recovery expected in the second half of 2015, we think the committee is unlikely to cut its policy rate again this year.

Although the rate pause helped the SET Index remain above the 1,500 points mark, we view upside as limited at current levels and recommend investors to accumulate quality Thai stocks on market pullbacks. 

With bad news on credit-quality deterioration already in the price, we reiterate our view on KBANK (Kasikornbank) as one of our top picks. Even though our bank analyst has trimmed 2015-16 earnings forecasts by 6 per cent per annum, she still forecasts 5-per-cent earnings growth for KBANK this year (versus 0-7 per cent for peers).

Meanwhile with traditional banks tightening lending, new opportunities are arising for financiers such as SAWAD (Srisawad Power 1979). The company recently started providing one-year working loans to mid-sized enterprises that are awaiting loan approval from banks. 

We forecast 31-per-cent earnings growth for SAWAD this year and 40 per cent for 2016 and expect its RoE (return on equity) to rise rapidly to 40 per cent in 2017 from 31 per cent in 2015F, thus supporting the stock’s premium P/BV (price to book value) multiple. Elsewhere, we see selective buying opportunities in the energy and petrochemical sectors, particularly for IVL (Indorama Ventures) and TOP (Thai Oil). 

IVL is a major beneficiary of the paraxylene down cycle and the huge improvement in MEG (ethylene glycol) spreads. Among energy stocks, we prefer TOP based on its high gross refining margin, favourable petrol spread and projected stock gains.