As we shift our focus to three investment themes for 2020 -- wealth transfer, tourism and energy -- we have lowered our SET earnings per share (EPS) forecast to 92 baht this year and 104 baht in 2020. We have also lowered our 2019 year-end SET target from 1,740 points to 1,580, and the 2020 year-end target to 1,640 to account for lower EPS and forward price/earnings (P/E) ratio.
Reduced liquidity, wealth transfer, tourism and energy are our themes for next year. We are positive on commerce, upstream energy, finance, selected banks and transport shares. We are neutral on downstream energy, telecoms, property, hotels and healthcare, and negative on utilities.
The Thai market has been reeling from bad news in recent months, and the new Super Savings Fund (SSF) adds salt to the wounds. Lacklustre third-quarter earnings, concerns about government instability, deteriorating GDP numbers, trade war uncertainties and outflows from defensive sectors (telecoms and utilities) caused the SET to dip below 1,600 points.
The final nail in the coffin was the Finance Ministry's decision to reject a proposed Sustainable Equity Fund (SEF) in favour of the less market-friendly SSF scheme to replace the long-term equity funds (LTFs) that expire at the end of this year. Given the past role of LTFs in cushioning the market, this has led to concerns about the risk of massive valuation de-rating for Thai stocks.
Theme 1. Reduced local liquidity: It's now up to local funds to mitigate the impact of the SSF scheme. We estimate that SSF inflows will be 70% less than for LTFs (the expected gap between SEFs and LTFs was estimated at 30%). This should negatively affect market liquidity from 2020 onward, as inflows could be reduced to 16 billion baht per year from 54 billion baht historically.
But if local fund managers can reduce the effect of LTF redemptions (386 billion baht outstanding as of Nov 30) by migrating LTF customers to "mirror equity funds", then the impact on the index can be mitigated.
We have lowered our SET targets to 1,580 points this year, 1,640 next year and 1,665 in 2021 to reflect lower EPS forecasts and gradually declining P/E ratios (from 15.2 times to 14.5 times forward P/E). If local funds fail to keep LTF customers, we expect that the SET forward P/E could slip further to 13-14 by 2021.
Theme 2. Wealth transfer upcountry: In our view, the government's decision to approve the SSF (as opposed to the more "middle-class-friendly" SEF) could reflect its desire to transfer wealth to rural areas in order to gain more popular support there.
In that case, we should see further benefit reductions for the middle class, with proceeds transferred to rural areas in the form of cash handout programmes. This could be positive for semi-durable and non-durable goods consumption.
This would, however, come at the expense of private investment and durable goods consumption as the middle class feels the pinch of a higher personal income tax, with a zero-sum result for the equity market. Nonetheless, specific sectors are likely to benefit more than others, and investors should position themselves accordingly.
Theme 3. Energy and tourism remain resilient: Increased production cuts by Opec will reduce the gap between production levels and the estimated volume required of the group to balance global oil supply and demand to a few hundred thousand barrels per day. While there is a risk of non-compliance from some members, there is an equally likely chance that not all of the projected non-Opec crude production increase of up to 2.1 million bpd will materialise next year. Subsequently, we expect the oil market to be relatively balanced, albeit with some hiccups in the first half of 2020.
At the same time, we expect the recovery in tourist arrivals to continue, thanks to returning Chinese visitors and an expanding Indian tourism base. Although this bodes well for AOT, we expect that hotels may come under pressure from price cuts until the baht weakens (which is unlikely to happen in 2020). Hospitals look promising, but we remain cautious due to our expectation of a strong baht persisting into next year.
We remain selective on commerce, banks, media, transport and energy shares. We prefer CPALL and BJC in commerce. Among banks, we have removed BBL and KTC from our top picks, maintained SCB and added AEONTS as beneficiaries of higher retail spending. We maintain PLANB because its share price has fallen sharply and media will be an indirect beneficiary of stimulus.
We have dropped all telecom stocks from our top picks, pending the outcome of 5G auctions and mobile competition. We maintain AOT on our top-picks list in light of the recent share-price decline resulting from concerns about passenger service charges and duty-free bidding. KKP remains on the list on expectations of strong fourth-quarter results. Lastly, we have added PTTEP because we expect crude prices to remain stable, and SPALI due to a strong project backlog.
But keep an eye out for telecoms, refineries, hotels and hospitals. Although we are neutral on telecoms, refineries and hotels, we see some room for optimism should certain conditions be met. For telecoms, the 5G auction must not produce a new player, and mobile operators are showing signs of cooperating in terms of prepaid and postpaid tariffs.
For refineries, crude premiums and freight rates need to come back down, and the impact of new International Maritime Organization clean-fuel rules needs to be more clearly defined. For hotels, price cuts need to come to an end, though it's unclear whether this can happen if the baht continues to strengthen against the Chinese yuan.
