SET uptrend to continue, but may be more modest

Market sentiment has been positive as global investors shifted focus to emerging markets once again. Fund flows in recent weeks have been towards emerging markets, especially mainland China, Hong Kong and India. 

In the Thai market, most sectors registered gains. Among the major sectors, healthcare rose 5.9 per cent, transport 4 per cent, banks 3.7 per cent, and food 3.1 per cent. Sectors that underperformed were energy (-0.2 per cent), ICT (information and communications technology, -1 per cent) and property (-1.4 per cent). 

Foreign investors were net buyers of Thai shares worth Bt5.2 billion, compared with local investors, who were net sellers at a similar value. To date, foreign investors remain net sellers at Bt19.6 billion worth of trade.

Local investors have been largely buying smaller stocks, while large caps received less interest. Larger-cap stocks in the SET50 Index have been trading at about 15 times earnings this year compared with 16x for the broad market (represented by the SET Index). In comparison, stocks in mainland China have been trading at 9.9x earnings, Hong Kong stocks at 11.6x, and Malaysian stocks at 17x this year. 

The valuation gap is high; we believe there will be stronger fund flows into mainland China and Hong Kong than Southeast Asia stocks, whose valuations are relatively rich. 

Foreign investors who are currently underweight Thai shares are not in a hurry to get back into the market. Although earnings-growth prospects of Thai companies are high at 16 per cent this year based on consensus earnings, the ratio of PE (price to earnings) to EPS (earnings per share) growth is already at 1.0x. 

There is a strong chance of a market consolidation in the coming weeks, but it would be a soft correction, as foreign investors are now ready to snap up Thai shares on price weakness. 

We recommend investors focus on large caps in major sectors. Our favourites are banking and property.

 

Tisco Securities

 

The Stock Exchange of Thailand rose 3.9 per cent in August and should see further modest improvement this month on the back of high liquidity, subdued inflation and increased political stability after the appointment of General Prayuth Chan-ocha as interim prime minister and royal endorsement of his 32-member Cabinet. Other positive catalysts for Thai equities are the rise in the Consumer Confidence Index for August to a 13-month high, the European Central Bank’s surprise interest-rate cut, and the expected lifting of martial law in parts of Thailand.

 The Thai market has jumped 22 per cent so far this year, eroding potential upside for many of our previous top picks. Valuations are beginning to look stretched, and we expect near-term profit-taking to kick in soon, possibly led by domestic trigger funds.

 In the property sector, which has easily outpaced the overall market, we have downgraded three stocks from “buy” to “hold” (LH, or Land and Houses; QH, or Quality Houses; and AP). Our only “buy” in the sector is now LPN because of its strong fourth-quarter launch plan and 54-per-cent earnings growth in 2015F.

 Bank stocks have also enjoyed an impressive rally this year (up 23 per cent since the May 22 military coup) and the sector is now trading on demanding 12-month forward valuations of 1.6-times PBV (price to book value) and 10.4x PER (price-to-earnings ratio). On a medium-term basis, we still like TMB, KBANK (Kasikornbank) and SCB (Siam Commercial Bank) for their strong earnings-recovery potential. At current levels, however, we view BBL (Bangkok Bank) as the only valuation laggard in this rally.

 Elsewhere, we have added SCCC (Siam City Cement) to our “buy” list after revising up our 2014-16F earnings by 6-7 per cent following better-than-expected results in the first half of this year. With the junta’s infrastructure plan worth Bt2.4 trillion for the next eight years, the company should be a key beneficiary of projected growth in cement demand of 5 per cent per annum in 2015-16.

 Among consumer-related plays our top pick is CPN (Central Pattana) because of upside from asset sales, a higher dividend pay-out ratio and an economic recovery that should boost tenant turnover-linked rents. Our analyst also sees Bt25 per share in “hidden gains” if CPN’s property assets were re-valued from book to market value, for example through asset sales to a REIT (real estate investment trust).

 

Research Department

Trinity Securities

 

The SET Index continued its volatility during this period, driven by foreign investors’ buying spree. Most sales come from local institutional investors, particularly trigger funds that closed their positions last week. We expect fewer sales from local institutional investors in the next period.

Positive factors from capital flows and likely excess local liquidity as a result of expiration of Bt10-billion savings bonds this week could lead to the SET Index gaining momentum in a range of 1,590-1,600 points, led by big caps, foreign investors’ likely targets, in banking, energy and communications. 

Other positive factors include the European Central Bank’s economic stimulus launched last week, its interest-rate cut, and purchases of ABS (asset-backed securities) and covered bonds since October to enlarge the ECB balance sheet to that in the early 2012, and the possibility of full-blown quantitative easing, similar to the US Federal Reserve purchase of government bonds.

We expect such measures, particularly the enlargement of the ECB balance sheet, to put high pressure on the euro. This could strengthen the baht against the euro and attract more capital for the EUR carry trade.

An indirect impact from the depreciating euro is a strengthening US dollar and, then, depreciating yen. Recently, the baht appreciated to a 15-month record against the yen. 

That could prompt capital movement for JPY carry trade in Thailand. The EUR and JPY carry trades will compensate capital that may flow out from a closing of USD carry trade in the next periods.

Investment strategy: Hold big caps to gain advantages from capital movement. Our top 10 picks for this month: TTA (Thoresen Thai Agencies), PSL (Precious Shipping), RCL (Regional Container Lines), TMB, LHBANK (LH Financial Group), CKP (CK Power), IFEC (Inter Far East Engineering), AKR (Ekarat Engineering), BMCL (Bangkok Metro), and BLAND (Bangkok Land). 

Profit-taking is seen in the middle of the month before the meeting of the US Federal Open Market Committee. 

Some FOMC members may agree on a faster-than-targeted interest-rate hike, and that could prompt stock-market volatility.