Post-election overview: shaky status quo
With the pro-military faction all but guaranteed (in our view) to maintain control of the government now that the election results are official, we expect the market to shift its focus towards the first-quarter earnings announcements of non-bank companies. Overall, we expect those earnings to decline year-on-year, due to the high-base effect (primarily for energy and petrochemical firms) but to improve significantly quarter-to-quarter.
However, the first-quarter figure for the broad market will still be slightly short of the 25-30 baht per share necessary to breach the 100-baht earnings per share (EPS) mark. Nevertheless, we expect SET earnings to gradually improve over the next several quarters, leading to expected 13% EPS growth for the SET index in 2019 and 2020.
We expect first-quarter EPS for the SET to be 24.60 baht, down 15.8% year-on-year but up 48.3% quarter-to-quarter. The key drivers of the quarterly improvement should be the telecom, petrochemical and energy sectors and, to a lesser extent, the banks. On a year-on-year basis, the banking, property and commerce sectors should be key drivers. (Note that our SET Commerce numbers are based on Bloomberg forecasts, while our SET Energy forecasts exclude the Utilities segment.)
As our year-end 2019 SET index target is based on 2020 EPS and forward P/E, and our SET EPS for 2020 remains unchanged, we are maintaining our SET index target of 1,790. We have also raised our 2020 year-end index target slightly, to reflect increased optimism about local liquidity, given that the pro-military faction is likely to retain power.
The Election Commission this week endorsed 149 of the 150 official party list seats, with the final one to be announced after new polling in Chiang Mai, where the earlier winning candidate was disqualified. This means 498 of the 500 seats are now official, paving the way for the government formation process to begin.
The Pheu Thai Party received no list seats because its constituency seats exceeded its share of the popular vote, per the EC's calculation formula. Future Forward received 50 list seats, the Democrat Party 19, Palang Pracharath 18 and Bhumjaithai 12. On a combined basis, Pheu Thai came first with 136 seats, followed by Palang Pracharath with 115, Future Forward with 80, the Democrats with 52 and Bhumjaithai with 51 seats.
In terms of the implications, the seven-party coalition led by Pheu Thai has a combined 245 seats, just short of a 251-seat plurality. Palang Pracharath and others have 253 seats. Should the latter coalition become the government (which is our base-case scenario), it would have only an eight-seat margin, which would be reduced further if a Pheu Thai ally wins in Chiang Mai. Note also that at the time of writing the Democrats and Bhumjaithai had not officially sided with Palang Pracharath, though they are widely expected to do so.
The Senate selection process, meanwhile, should be completed within days, and parliament will convene and vote for the prime minister within 15 days. We expect the Senate to be aligned with the pro-military faction, giving Palang Pracharath and its allies control of the legislative branch. Should Gen Prayut Chan-o-cha be elected as prime minister (which is likely in our view), it will also retain control of the executive branch.
However, the coalition's lead over the Pheu Thai-led opposition would be less than the 10+ seats we had projected earlier. Thus there may be little hope that many new bills will get enacted over the lifespan of the new government. The risk of a no-confidence motion by the opposition in the near term may also be high.
Nonetheless, the military government still has two weeks to make use of its extra-constitutional power to resolve outstanding issues or deadlocks, and most of the laws that the military wanted to enact have already been enacted anyway. We therefore expect the new coalition government to maintain the status quo and come up with minor economic stimulus packages to prop up the economy until the next election takes place -- potentially as early as next year.