Capital inflows a factor, but caution advised

A large amount of capital returned to the stock market on expectations of major economies’ central banks continuing their low-interest-rate policies. The US Federal Reserve, the only central bank that will likely raise its rates, is expected to postpone such increases to the latter half of 2016. Under these circumstances, excess liquidity started to move back to risky assets to find better returns. 

Prices of main commodities like gold, oil and steel increased while stock markets in Asia gained. However, if capital flows into the Thai bourse during this time, it is important to be cautious. 

It’s believed that the direction of capital could be changed rapidly with short-term profit taking, which could ease the SET Index’ fluctuations. In another aspect, it’s believed that there will be less capital moving into the Thai stock market than in the previous rounds. Trading following capital movements must be monitored closely. 

One more point that must be focused on is the direction of local interest rates. 

In the previous two weeks, commercial banks announced cuts in their minimum lending rates by 25 basis points (about 60 per cent of loans refer MLR) without deposit-rate cuts. Thus analysts slashed their estimates for 2016 net profit of commercial banks by 5 per cent from the previous estimates, or about Bt10 billion. 

Late last week, big banks reduced their minimum retail rates by 25 basis points (about 20-30 per cent of loans refer to MRR) on belief that other commercial banks might follow their MRR cuts. This could prompt a further downward revision of banks’ estimated net profits in 2016 by Bt5 billion, or 2-3 per cent from the previous estimates. 

The impacts from the rate cuts will take effect from the current second quarter onwards. The overall market impact from the profit cut will likely reduce listed companies’ EPS (earnings per share) from Bt90.25 to Bt88.66. At the PER (price-to-earnings ratio) of 16.23 times (5 per cent market earning yield gap), the SET Index is targeted to decline to 1,440 points. 

The SET Index this week could continue to be driven by capital flows. However, its upside risk may be limited to 1,440 points. 

Focus more on stocks for investment. Attractive stocks are those in construction that will gain from state investment projects. 

Stock picks: CK (Ch Karnchang; construction), SCC, TASCO (Siam Cement, Tipco Asphalt; construction materials), and commodities. Weight on soft commodities like soy pulp. Stock pick in this sector: TVO (Thai Vegetable Oil).

 

 

Prakit Sirivattanaket 

Vice president

Kasikorn Securities

 

The unwinding dollar situation will likely continue until the US Federal Open Market Committee meeting on Wednesday. Our research department expects the Fed to maintain its benchmark rates, which could encourage capital to move into risky assets, particularly hard and soft commodities. This will give advantages to commodities-linked stocks as reflected in a strong recovery of oil prices. 

After the Songkran Festival, the SET Index jumped by 2.78 per cent. Commodity-linked groups like energy, petrochemicals, agriculture, and shipping rose. Other groups remained steady or underperformed. While capital flows into commodities, three groups are expected to outperform the market and have opportunities to rise further. Focus on commodity plays. 

Wait for purchase or hold energy (PTT, PTTEP), petrochemical (IVL, PTTGC) or agriculture (KSL, TVO) stocks or speculate on STA, TRUBB, TTA or RCL. (Note that the latter four stocks that are not in the KS analysis.)

Almost all large banks gradually announced their earnings performance. Most came close to our forecasts. The next after the banking sector is the real sectors like construction materials, energy and others. More buying sprees will likely be seen for speculation on earnings performance. Our research department made initial forecasts in the following groups.

lGroups with expected improvement in per-|formance quarter on quarter and year on year: |hotel (CENTEL, ERW); food (MINT, CPF, TU); hospital (BH, BDMS, BCH); transportation (AAV, BA, AOT); |retail (MAKRO, GLOBAL); construction (ITD, TTCL); energy (BANPU, SCN)); petrochemical (IVL); real estate (LPN); finance (SAWAD, MTLS, GL, ASK, THANI); |electronic components (KCE); and entertainment |(RS, WORK).

lGroups with expected improvement in earnings performance quarter on quarter but likely deterioration year on year: energy (PTT, TOP, IRPC); retail (COL); construction (CK); real estate (JWD, LH, PS, QH, SC, SPALI); finance (AEONTS); communications (DTAC, SAMTEL, SIM, SAMART, TRUE); transportation (BTS); entertainment (BEC, MCOT, MAJOR); and electronic components (SVI). 

lGroups with expected deterioration in earnings performance quarter on quarter and year on year: retail (KAMART); construction materials (SCC); energy (PTTEP, PTTGC, BCP, SPRC); communications (ADVANC, INTUCH, JAS); real estate (AMATA, TICON, AP, ORI, SIRI); construction (STEC); finance (KTC, BLA); and entertainment (VGI).

lGroups with expected deterioration in earnings performance year on year but improvement quarter on quarter: retail (BEAUTY); construction (STPI, TRC); finance (TK); retail (BIGC, CPALL, HMPRO, CPN); communications (THCOM); entertainment (PLANB); and electronic components (HANA, DELTA).

Based on the above, our research department |picks stocks with upside risks for speculation on |first-quarter earnings performance. They are CENTEL (Central Plaza Hotel), BH (Bumrungrad Hospital), |BA (Bangkok Airways), MAKRO (Siam Makro), TTCL, SAWAD (Srisawad Power 1979), MTLS (Muangthai Leasing), KCE (KCE Electronics), CPALL, HMPRO |(Home Product Center), CPN (Central Pattana), |THCOM (Thaicom), RS and WORK (Workpoint Entertainment).