After moving mostly sideways since the beginning of the year, the Thai stock market has started to show some signs of life with the SET Index rising beyond 1,640 points at mid-September.
The next big question is whether the market will be able to maintain its current positive momentum. To answer that question, we need to look at key economic fundamentals as well as liquidity.
As far as the economic landscape is concerned, the Thai economy performed quite well in the first half with 3.5% year-on-year expansion of gross domestic product. The stronger than expected growth is encouraging economists and investors to make upward revisions to their forecasts for this year and possibly for 2018.
According to the September survey by FocusEconomics, the current growth forecast for 2017 is 3.4%, up from 3.3% three months ago. The ongoing upward revision trend is the first in many years. It is also encouraging to see that economic growth has become more broadly based.
The near-term catalyst for the economy and market sentiment is provided by ongoing government infrastructure projects as well as the development of the Eastern Economic Corridor (EEC).
As far as domestic liquidity is concerned, low interest rates and a huge current account surplus imply that overall liquidity remains more than ample. All things considered, there is good chance that Thai market should be able to maintain its upward trend.
Despite the recent market rally of around 5.3% since late August, however, the SET remains a laggard compared with other markets. For instance, the MSCI Asia ex-Japan index has risen by 29.8% for the year to date, against just 6.1% for the SET.
In terms of market valuations measured by price/earnings ratios, the Thai market remains at a deep discount compared with the MSCI Asia ex-Japan as the ratio currently stands near -2 standard deviation. This also implies that there is plenty of room for Thailand to catch up with regional markets.
Nonetheless, some near-term headwinds could arise from this week's meeting of the Federal Open Market Committee. It is a foregone conclusion that the Fed will keep its key interest rate unchanged, and it is also expected to officially announce plans for balance sheet normalisation. However, investors will watch closely for any guidance on upcoming monetary policy adjustments. Any unexpected messages could still cause near-term market jitters.
The Bank of Japan will also meet this week, though the impact on markets will be fairly limited as the bank is widely expected to maintain its policy stance.
Geopolitical developments, especially those related to North Korea, could still undermine positive market momentum. In the short term, we expect the SET Index to hover in the range of 1,640 to 1,680 points.
Our stock picks for this week are PTTEP, KCE, BLA and WHAUP. The share price of PTTEP in particular has been lagging and should turn positive in line with the recent recovery of global oil prices as US refining activity picks up after storm Harvey. KCE shares have suffered from the sharp rise of copper prices in recent months, but should continue to firm up now that copper prices are easing. Improving demand for electronic components from key global markets is also helping.
Meanwhile, there is a good chance that bond yields will creep up this week given that the Fed is expected to announce plans to reduce its balance sheet. This should benefit BLA as its share price appears to have a high positive correlation with bond yields.
Lastly, we add WHAUP to our stock picks for this week as its share price should benefit from EEC development. Given the nature of the company, which offers utility services (water procurement, power generation and distribution), share price performance tends to be lacklustre compared with industrial estate companies that have already moved up steeply. Thus, it would be a good time to start accumulating the stock.
Isara Ordeedolchest is senior vice-president for investment strategy with SCB Securities.