CLSA Securities (Thailand) has lowered its SET index target from 1,480 to 1,290 points this year after trimming its listed companies' earnings growth forecast from 15% to 11%.
The cut was prompted by months of political turbulence and economic doldrums.
A call for a new general election will delay forming a functioning government, slow down government spending, deepen already waning domestic consumption and inevitably take a toll on economic growth, said Prinn Panitchpakdi, CLSA’s country head.
The Constitutional Court last week ruled that the inconclusive Feb 2 poll was unconstitutional as voting was unable to take place on the same day nationwide.
Mr Prinn said CLSA last month downgraded Thailand's gross domestic product (GDP) growth from 4.8% to 2% this year because of the prolonged political uncertainties.
Political tension will escalate to a critical point in the next two months as courts and the National Anti-Corruption Commission are due to rule in several legal cases or press charges against the caretaker government led by Yingluck Shinawatra, he said.
These cases include the controversial rice-pledging scheme, the attempted constitution amendment and the caretaker government's term.
The benchmark stock index is more likely to fall to 1,200 points than surge to 1,400 points this year, given that the stock market's price-to-earnings (P/E) ratio has reached 12.5 times compared with 10.5 times on average in the past, Mr Prinn said.
The Thai bourse is not so cheap currently and some sectors including aviation and tourism have been fully valued. However, laggards are still available in sectors such as industrial estates, so investors are recommended to adopt a selective investment strategy with a focus on high-dividend plays, he said.
Thai shares yesterday edged up 0.3% to close the market at 1,354.01 with thin turnover of 23.73 billion baht.
Offshore funds' exodus from emerging markets including Thailand to developed economies following the US Federal Reserve retreat on its asset purchase scheme has also depressed the Thai stock market.
Mr Prinn said the global economic recovery remains uncertain and the US central bank's quantitative easing (QE) seems to have failed to help the real economy pick up.
"Some economic readings such as low inflation at 1.1% indicated that pumping money into the economic system does not work. The Fed will consider increasing the size of QE again if inflation continues to cool down. The US is now concerned about suffering the same fate as Japan in falling into a deflation trap," he said.
With US stocks quite expensive with P/E ratios above 20 times, global fund managers could consider increasing their investment weighting in Europe and Japan instead of the US this year, Mr Prinn said.
Gold will become an attractive investment if its price falls to below US$1,300 per ounce, he added.