SET rallies as Brexit fears ease, consumer spending picks up

The Stock Exchange of Thailand has been on an uptrend on the back of funds flows into emerging markets after Brexit fears eased. The break-up of the euro zone is off the table for now. as other countries in the European Union are aware of the potential damage of Brexit to the UK economy.

The British pound continues to find new lows. The Bank of England has launched a series of monetary-easing measures to placate its financial markets. The BoE is now expected to cut the benchmark interest rate to zero and announce more quantitative-easing measures once the next government is in place, according to DBS Bank economists.
The SET rally over the past two weeks was primarily fuelled by fund inflows as risk appetite returns. We remain cautious, however, and recommend that investors stick with companies that have solid fundamentals and strong cash flows. For income-oriented investors, we believe property funds and real estate investment trusts will continue to perform well. We note that global investors have been pouring significant amounts of money into REITs (real estate investment trusts).
The Vanguard REIT ETF, the largest exchange-traded REIT in the US market with a fund size of US$31.4 billion, has seen net inflows of $3.5 billion over the past six months. In the past one year, the total return of the Vanguard REIT ETF was 14.8 per cent. Given that global yields are under pressure, we believe that money will continue to flow into this space.

Tisco Securities
After a steep one-day decline in reaction to the unexpected Brexit referendum outcome, the Stock Exchange of Thailand quickly recouped all its losses and closed last Thursday at a new year-to-date high. This was partly due to investors’ realisation that we are still at the very early stage of the Brexit process (which could take several years) and that the impact on the Thai economy should be limited.
In addition, global stock markets have staged a strong rebound on hopes of further easing measures by central banks to address the Brexit fallout.
The SET’s rally has also been supported by upbeat macro data in May that showed the private consumption index rising 5.3 per cent year on year to its highest level since 2013 as the impact of the first-car scheme finally disappeared.
Other positive signs for the consumer-spending outlook are a back-to-back increase in farm income in May and the first decline in two years in the ratio of household debt to gross domestic product. Another market catalyst is the government’s plan to open bids on six projects worth Bt378 billion in the second half of 2016. These are the Orange, Pink and Yellow mass-transit lines, the Prachuap Khiri Khan-Chumpon dual-track railway, and two major motorways.
The contractor sector has just started moving over the past week but it is still far behind the SET’s 13-per-cent gain year-to-date. CK (Ch Karnchang) is our top pick because of its strong project backlog with sizeable potential projects in the pipeline, robust recurring income, and investment exposure in Laos and Myanmar.
Other stocks we see as direct beneficiaries of government infrastructure spending are STEC (Sino-Thai Engineering and Construction), UNIQ (Unique Engineering and Construction), SCC (Siam Cement) and TASCO (Tipco Asphalt).
While our SET Index target remains at 1,460, our sector/stock picks have changed. Previously, our top picks were mainly in the external facing sectors. We now expect that the tourism sector could be affected by tourist arrival/spending cuts as a result of euro and sterling devaluation and declining GDP growth in the euro zone and the UK.
Oil-linked petrochemical stocks could underperform in the near term, as a stronger US dollar creates downward pressure on crude-oil prices. This has led to removal of PTTGC (PTT Global Chemical), IRPC and AOT (Airports of Thailand) from our top-picks list.
Conversely, we see better prospects for some of the high-yield domestic names. ADVANC (Advanced Info Service) and INTUCH (InTouch Holdings) could see positive earnings surprises in the second and third quarters as we suspect that management expense guidance is out of sync with what is happening on the ground.
We also maintain our positive view on SCB (Siam Commercial Bank) and KBANK (Kasikornbank) on NPL (non-performing loan) formation improvement and a pick-up in consumption.