The Thai stock market looks cheaper as it begins to price in risk factors overseas. Financial risk in the European Union (EU) has apparently increased, even though the European Central Bank (ECB) is providing more liquidity and is intervening in the fixed-income market. It appears that several banks in the EU cannot easily access funding, according to the ECB’s chairman. Hence, we believe the risk of financial turbulence in the EU remains high.
The Thai stock market rebounded last week on a strong statement from the ECB, and the German chancellor, to support recap of private banks. We view that a rise in the SET would be short-lived rather than indicating a new up-trend. Our model forecasts that the volatility of the SET will rise this week, which suggests that we should be more on guard. An expectation of a positive result from the EU foreign ministers’ meeting on October 13 may spark speculation in the stock market later this week. We expect the SET to move in the range of 903-950.
The SET rebounded from a 14-month low last week amid gains in global stock markets following optimism that EU leaders will take prompt decisions to shore up Europe’s banking system. News of a coordinated plan to recapitalise banks has given a short-term boost to investor sentiment but concerns remain that a debt default by Greece will spread the contagion to other European nations. Hence, the relief rally in global markets could quickly run out of steam.
We believe that hot money reversals on the capital account remain the foremost risk for the SET, given the massive accumulation of foreign holdings in both the fixed-income and equity markets since around the time Quantitative Easing 2 was announced in mid-2010.
In September, foreign investors sold a net Bt16.5 billion in Thai equities after Bt42 billion of net sales the previous month. Foreign net buy and sell activity in the bond market is probably a more important liquidity driver for the SET than equity inflows themselves, given the five-to-one relative magnitude of bond flows over equity flows in recent times. September marked the first calendar month of foreign net selling on the bond market since February 2010.
One positive development is the return of foreign net buying of Thai equities in recent days, although some of this was due to third-quarter window-dressing and short-covering. Thailand’s relatively healthy balance sheet – government debt to GDP of 40 per cent, household debt/GDP (28 per cent) and corporate gearing (0.4×2011) – offers some resilience amid global uncertainty. In a regional context, the SET is a value market with a price to earnings for 2012 of 8.6, price to book value of 1.5 and dividend yield of 5.2 per cent.
Our order of weightings preference remains banks followed by “pure” domestic names (commerce, telcos and property) and then external cyclicals (energy and petrochemicals). For banks, we believe valuations have adequately discounted risks associated with exposure to the export sector. For external cyclicals, valuations for the group remain above first half of 2010 pre-Quantitative Easing 2 levels, suggesting further downside risk given their direct exposure to slowing global demand.
Source: The Nation