Don't catch the falling knife
The steep declines this week in equity prices and bond yields, both domestic and international, reflect fears that coronavirus cases outside China will mark the start of a wider outbreak that will deal a blow to the global and Thai economy, resulting in a downgrade of the SET.
The latest data shows that more than 80,000 people have been affected by the virus. While the number of new patients in China continues to decline, the number of infected people outside China has begun to increase at an alarming rate, especially in Japan, South Korea, Italy and Iran.
The number of patients in Thailand has been climbing as well. The risk was underlined by a case at the B.Care Medical Center in Sai Mai district of the capital, where an infected elderly couple who had just returned from Japan did not disclose their itinerary. They later tested positive for the virus, putting up to 40 hospital staff at risk of infection, as well as numerous family members.
Bear in mind that the spread of the virus outside China includes more than 700 people who were in the closed environment of a single cruise ship. Another reason seems to be the emergence of a "super spreader" or an infected person that is unusually contagious. In South Korea, for example, the number of patients skyrocketed because one infected woman who did not know she was infected participated in the activities of a church.
With a more severe situation than previously anticipated, we have adjusted our assumptions about the severity of the coronavirus and the impact on the Thai economy. We are closely monitoring two important factors.
The first is local transmission, especially if there is a "super spreader" in Thailand. If this is the case, according to several epidemiologists, the virus may spread to the same (broad) extent as influenza does each year.
The second is shutdowns of both international and domestic economic activity. At present, numerous points of economic activity have been closed in affected countries (apart from China), including Iran, Italy and South Korea, while the Thai government has now classified Covid-19, the technical name for the illness, as a deadly disease.
This will make it easier to close important places such as government offices and schools, and to curtail gatherings and cultural activities. Although closures do help control the spread of the virus, they will undoubtedly hurt economic activity.
With that assumption in mind, we have revised down a number of economic variables, most importantly the tourist forecast. A number of countries have begun to suggest avoiding travel to Thailand. As a result, we have revised down our inbound tourist forecast by 10% to 35.8 million arrivals in 2020 from 39.8 million in 2019.
This will eliminate roughly 190 billion baht in tourist revenue, or about 1.2% of GDP. In the first half of the year, the revenue loss will be about 210 billion baht, with a moderate rebound in the second half to near 19 billion baht.
The sizeable loss in tourism revenue has mandated a reduction in our GDP growth estimate for this year, from 2% to between 1% and 1.5%. Growth will contract in the first quarter, stabilise in the second and recover in the second half of the year.
Private consumption and investment will be severely affected by the missing tourism revenue in the first half of the year, which will affect employment in tourism and related industries and subsequently decelerate overall consumption and investment.
The international pandemic will lead to a global economic slowdown, especially in Europe, the US and Asia, collapsing demand for Thai products and services and affecting our exports and imports. Supply chain disruption has caused a major stoppage in production in several regions of the globe and will spread to affect the manufacturing sector in Thailand, leading to a plunge in production locally in the first half.
Sectors most vulnerable in this scenario are Energy, Petrochemicals, Tourism and Transport, all of which will be hurt badly by weak demand. We are thus downgrading net profit forecasts in the range of 5-10% from initial estimates.
For the banking sector, the deterioration in asset quality will lead to a contraction of 6.5% in net income this year. Net profit for the automotive sector will be hit badly by the supply-chain shock, resulting in a contraction of 10.1%. Using this bottom-up approach, we calculate the fair value of the SET at 1,350 points.
In terms of strategic recommendations, we believe it is reasonable to start investing in companies with good fundamentals when the SET is lower than 1,400 -- now, in other words. At the same time, investors must exercise extreme caution. "Catching a falling knife" should be avoided at all cost.
Piyasak Manason is senior vice-president and head of the wealth research department at SCB Securities. Email firstname.lastname@example.org