At its current level, the Thai stock market is quite attractive in terms of forward price-to-earnings (P/E) ratio and equity yield gap for 2020, especially now that progress has been made towards a Sino-US trade deal.
Year-end target for 2020: Our base-case SET target for the end of 2020 of 1,683 is pegged to a P/E ratio of 16.5 times, which is about 1 standard deviation above the five-year mean of 15.4 times. Our 2020 earnings per share (EPS) forecast of 102 baht is slightly below the consensus of 103.10.
Under our bull-case scenario for year-end 2020, a further market re-rating could push the SET to around 1,768 (a P/E ratio of 17 times and EPS of 104 baht), supported in part by effective government economic measures and eased concerns over global trade.
Sustained low bond yields in an environment of dovishness among major central banks (and the Bank of Thailand) and quiescent inflation (below the target of 2.5%) would keep the equities-bond yield gap wide, boosting the relative attractiveness of equities.
Under our bear-case scenario, the market P/E ratio at the end of 2020 could fall to 15.4 times (the SET's five-year mean), implying an index of 1,509 with an EPS of 98 baht, squeezed by weaker global and domestic macroeconomic conditions. Persisting trade conflict could keep investors skittish; if the Sino-US trade dispute were to intensify, the forward market P/E ratio could fall below its long-term mean.
Attractive yield gap valuation: The SET's yield gap against the 10-year Thai government bond of 4.1% puts it deeper into cheap territory, while its yield gap against the three-year bond puts it in only modestly cheap space, based on historical data.
Assuming that the Sino-US trade conflict doesn't intensify further, the current valuation gap implies an attractive market level with key support at 1,531 points (a yield gap 0.7 standard deviations below the mean). On the other hand, if the trade conflict were to escalate further, the yield gap could stay wide for longer.
In any case, considering that analysts' cuts in EPS forecasts tend to trail the market (pricing in perceived risk to earnings), a yield gap valuation level of 0.7 to 0.8 standard deviations above the mean (implying a SET index between 1,495 and 1,530) would be an interesting entry level: historically, during the past decade, the yield gap has stayed within that range for only a few months (at most) before the market has rebounded.
Unless the risk is economic recession, the wide yield gap of 0.7 to 0.8 standard deviations above the mean should not last more than a couple of months this time around.
P/E premium over Asean peers: Because high-P/E (more than 30 times) stocks -- chiefly in the Transport and Utilities sectors -- now comprise 21% of the SET50 (up from peak P/E levels of just 9-11% in 2013 and 2015), the SET P/E ratio is now at a premium against Asean peers (Indonesia, the Philippines and Malaysia).
The high P/E ratios of many stocks are supported by expectations of swift business and earnings growth in the coming years from secured new capacity and/or anticipated investments. The change in the structure of the SET P/E ratio should keep the broad market valuation elevated (relative to the SET's historical P/E ratio) over the next couple of years until the growth profiles of those stocks normalise. This could occur either as high-base effects start kicking in or due to a lack of opportunities to expand capacity, causing the prevailing P/E ratios of stocks in the 40-times-plus range to scale back to between 20 and 30 times.
The forward P/E ratio of 15.1 times for 2020 is not too demanding, assuming moderately stronger Thai economic growth next year. If lingering risks -- particularly trade conflict -- were to ease, there would be scope for upside.
Budget approval adds firepower to stimulus: Despite the delay to passing the fiscal 2020 budget to January or even February (the fiscal year actually started on Oct 1, 2019), the government has launched several stimulus measures during recent months worth more than 400 billion baht (about half in the form of low-cost loans from state-owned banks).
Farm income guarantees alone are budgeted at 70 billion baht, but the actual amount could be lower, as the prices of some farm products (particularly palm oil and rice) have increased recently.
Additional stimulus measures are expected after the fiscal 2020 budget is passed, especially related to welfare programmes that were promised during the election campaign. The central budget is worth 518 billion baht (up 10.7% year-on-year) and will include substantial economic stimulus on top of normal allocations for government departments.
Infrastructure project acceleration: Several big-ticket infrastructure projects have been signed in recent months, among them the three-airport high-speed railway and the third phase of the Map Ta Phut seaport. Others -- Laem Chabang port's third phase and U-tapao airport expansion -- are pending.
Several more projects are being reviewed by the transport minister with an eye to opening new tenders. It could take some months for the government to open any further new big-ticket projects to tender, such as the Purple-South and Orange-West commuter train lines and the Map Ta Phut-Nong Khai standard-gauge railway. All three planned projects have made progress in the environment impact assessment process.
