Similarly, the 10year German bond yield, which has recently broken above 0.7 per cent, could move up further to test the 1.0 per cent level. If these scenarios pan out, the developed markets’ bond rout would see no signs ofabating.
Interestingly, the Bank of Japan (BOJ) has signalled to the market that it will chip in to fight the global bond rout. As a result, the BOJ increased its bond purchases last week. On Friday, the central bank offered to purchase “unlimited amounts” of 510year Japanese government bonds at fixed rates.
As of February 2, the 10year Thailand government bond yield stood at 2.35 per cent, which is significantly lower than the 10year US yield of 2.79 per cent. This is not justified, as Thailand’s credit rating is BBB+, which is much lower than the US AAA rating. Hence, once investor concerns over risฌing US inflation fade, a reversal in trend for US yields would occur. We advise investors to prepare for further bond market turbulence in the near future. For the equity market, we believe any shortterm weakness should offer opportunities to accumulate key stocks with strong fundamentals.
After a 4.2percent gain in January, we expect the SET to see further consolidation this month, with a likely trading range of 1800 and 1850. A correction on global stock markets triggered by rising US bond yields and volatility in oil prices has led to a more cautious mood among investors. This has been reinforced in the Thai market by weak fourth-quarter bank results, confirmation of an election delay and disappointing macro data for December.
However, we believe that the Thai market will soon shrug off the negative news flow and extend its rally. The prospect of strong first-quarter earnings in 2018, a more robust economy (particularly with regards to private consumption and private investment) and undervaluation of some large cap sectors means there is still scope for the SET index to move higher – provided that crude oil prices remain at elevated levels throughout the year. The SET could get a shortterm boost if the NLA approves the Eastern Economic Corridor (EEC) bill later this month, a move that could lift sentiment for stocks such as AMATA, WHA and TICON.
Buying momentum could also pick up late this month ahead of the dividend season in March and firstquarter earnings announcements in May (for the latter we expect to see substantial yearonyear growth due to the low base effect). Domestic institutions are clearly more bullish on the market’s prospects than foreign investors. The former were net buyers of Bt5.4 billion of Thai equities in January while the latter were net sellers of Bt5.7 billion.
At this point, the healthcare, banking, construction materials and property sectors remain attractive as these trade at one (or lower) standard deviation above historical mean, whereas the SET currently trades at close to 1.7 times above mean. Telcos are likely to play a more supportive role after the spectrum auction tentatively scheduled for May, while we see energy stocks trending higher as crude prices now seem to have ended their correction.
We expect the SET Index to move sideways in a range of 17901850 points in February. Key factors need monitoring extend from the US bond yield, Thai bond yield, direction of US dollar and global crude price, US budget issue to announcement of Thai listed companies’ 2017 fourthquarter earnings performance. Amid high valuation of the Thai stock market, we suggest a selective strategy for stocks with high dividend yield which usually make satisfacฌtory adjustments in February of every year. Stock picks:
1) Residential Group (AP, LH, QH, SIRI); 2) Securities and high purchase (ASP, KKP, TISCO, TCAP, ASK); 3) Refineries (BCP, IRPC, TOP, SPRC).
Published : February 04, 2018
By : Thanawat Patchimkul Head of Research, DBS Vickers Securities (Thailand)