Head of tactical research
The SET Index dropped 0.97 per cent to close at 964.04 points after a week in which the market’s movements caused headaches for analysts.
It seems that the market continues to react to surprises from Europe, which cause equities to wander aimlessly. A solution to the debt crisis in the European Union remains elusive as the political conditions in each EU member make it more difficult to end the game.
European banks are reluctant to recap and won’t ask for a bail-out from their central banks. As such, they will attempt to de-leverage their balance sheets by selling risky assets and reducing credit expansion. While the flooding in Thailand seems to cover more and more industrial estates as well as residential areas, the cost of recovery increasingly appears to go over earlier estimates by the Thai government. As the government needs to spend a large amount to rehabilitate the country, the reduction of the corporate income tax for next year to 23 per cent is at risk of postponement.
If we assume the corporate tax at the same rate of 30 per cent, earnings of listed corporations under our coverage will likely grow by a single digit, which translates to a reduction of 50 points from our earlier 2012 year-end target. Therefore, we maintain our defensive strategy with 50 per cent in equities and the remaining 50 per cent in cash. Our stock picks are HMPRO, CPN, VNG and BIGC.
Assistant managing director
Although the Thai stock market rose last week in response to good news from the resolution of the eurozone debt crisis, expectations for the G-20 meeting and Thai listed companies’ earnings performance, Europe is at risk of contraction. Its economy is still very fragile. Major economies like the US and China also show signs of slowing. These appear as medium-term market risks, limiting any upside. The country continues to be affected by the floods and it is difficult to estimate the losses, which could be higher if inner Bangkok is inundated.
Although the stock market has positive momentum with a chance to test 973 or 985 points this week, we suggest investors gradually reduce their investment portfolios due to medium-term risks. Good news could taper off after the resolution of the eurozone debt crisis. This time, speculation could be directed at stocks unaffected by the flood and eurozone debt crisis, such as ADVANC, CPF, HMPRO, SCCC, DCC, TASCO, VNG and TTCL.
We have rolled over our SET Index target from end-2011 to end-2012 and cut the target level to 1,000 points from 1,180 points. The reasons for our downgrade are: business and psychological impact from Thailand’s worst flooding in 50 years, general deterioration in the outlook for domestic and global GDP growth, and downside risk to earnings and target prices. We peg our new SET target based on one standard deviation above the historical average yield gap between SET earnings yield and US 10-year treasuries.
The Finance Ministry estimates that GDP growth could fall by 1.1 percentage point this quarter from the flooding, lowering full-year growth to 2.0 per cent versus the ministry’s recent estimate of 4.0 per cent. The Bank of Thailand is even more pessimistic and has revised down its 2011 economic growth forecast to just 2.6 per cent from 4.1 per cent. On a GDP base of Bt10 trillion, a 200-basis-point hit to the rate of growth translates to Bt200 billion (US$6.5 billion) of foregone or stalled domestic production. Although central Bangkok appears to have escaped the flooding, there is a serious risk that the disaster could deter future foreign direct investment (FDI) originating from Japan and elsewhere. The concern is especially pertinent amid the prevailing theme of late that the March 2011 earthquake and tsunami in Japan would result in outward relocation FDI flows to Thailand.
A screening of SET big caps reveals some silver linings of operational defensiveness against the adverse impact of the floods, especially telecom, energy, petrochemical, commerce, food, and, to a lesser extent, bank stocks. Hence, we anticipate a moderate upside for the market based on our new SET target and end-2012 horizon despite the severity of the current situation. Smaller-cap sectors such as property, electronics and autos are among the more severely affected industries. Our top picks are PTTGC, TOP, CPF, CPALL, SCB and ADVANC.