The local equity market saw heavy selling across the board in late June as fears of emerging-market currency contagion and a US-China trade war gripped global markets. A brief market panic ensued, driven by a combination of factors.
Investors reacted to the lacklustre earnings outlook for Thai small-caps, global oil price declines, temporary baht weakness (the currency fell to 33.44 to the dollar in mid-July from 31.20 in April), and knee-jerk downgrades of the SET index target by various sell-side strategists and analysts. The SET index fell by 120 points during the last two weeks of July alone.
But sentiment has since revived in light of stronger-than-expected economic data, Q2 bank earnings that beat forecasts, and most recently the endorsement by His Majesty the King of the final organic laws needed to pave the way for an election next year.
Also helping was the recovery of the baht to 32.40, coupled with Brent oil prices once more testing $80 a barrel, which helped push the blue-chip index back to January levels.
Going forward, we think any announcement of a short-term stimulus package to stimulate consumption in the provinces would be highly positive for the SET. The last time we saw a major stimulus package was in 2015, when the government set aside 780 billion baht for various programmes.
Although we expect the size of any new stimulus to be much smaller (313 billion baht), we believe it will be much more targeted towards farmers (last time only 21% of the budget consisted of cash handouts to rural poor). As a result, cash disbursement from September 2018 to June 2019 will likely reach or exceed the levels seen in 2015-16.
Consequently, we maintain our previous view that pre- and post-election spending should benefit domestic-facing sectors such as banks and commerce/media, while contractors will benefit from an accelerated infrastructure bidding and roll-out time frame.
We expect the usual spending by various political parties during the 30-40 days leading up to the election, which will likely happen in May. This will further add to a one-off cash influx upcountry of 20-30 billion baht. This sum will be dwarfed by government spending which should average 30 billion per month.
There are three factors that could derail our positive view: oil prices, currency and a trade war. We believe oil prices will remain well supported thanks to limited capacity for Opec to pump more at a time when supply is being squeezed by US sanctions on Iran and disruption in Libya, Iraq and Venezuela.
Foreign exchange is a major risk (as always), but we expect the strong current account surplus to keep the baht relatively resilient in the face of further US interest-rate increases. The prospect of a local rate hike should provide further support.
While we acknowledge that rising interest rates generally lead to increasing interest expense for companies, we note that interest rates should have only limited overall impact on SET-listed firms in the medium term given the heavy use of bonds to finance debt (88% of outstanding debts are bonds currently).
Finally, while the US-China trade war remains a risk factor, we take some comfort in the fact that if it continues to escalate, the effect is likely to be felt in 2019 and not in 2018.
To account for these risks, we have revised down our 2018 SET earnings-per-share EPS forecast from 109.50 baht to 109 to account for a lower-than-expected earnings contribution from TRUE and non-big-cap companies (down 32% year-on-year in Q2). We have also trimmed our 2019 EPS forecast from 121 baht to 119.50 to factor in potential forex losses as we expect the baht to weaken next year to 34 to the dollar.
Despite the downward EPS revisions, however, we maintain our year-end SET index target of 1,850, which implies a forward P/E ratio of 15.5 times. Given that the majority of earnings downgrades for both 2018 and 2019 have come from non-core contributions, we have kept our SET target unchanged.
As the election timeline becomes clearer and more details of government disbursement plans emerge, we expect the market to rise in the fourth quarter to our 1,850 target. Supported by the usual LTF-driven rally at year-end, we believe our target is within reach.
In conclusion, in light of the recent royal endorsement of the election-relate laws, all key parties are on board with the idea of a poll in the next few months. The added credibility means investors should continue to crowd around election-related theme stocks.
Consequently, we expect to see a further shift from energy, petrochemicals and utilities, which have generally outperformed, to domestic-facing sectors in the fourth quarter including banks, consumer goods and building materials and contractors.
We have removed all property picks (LH, QH, PSH) from our model portfolio as we think the sector will see very little benefit from our pre-election spending theme, and bolstered our domestic picks with TMB, ROBINS and STEC. Our top picks for the rest of the year consist of BBL, KBANK, TMB, CPALL, BJC, ROBINS, CK, STEC, CPF, IVL, TRUE and INTUCH.