Nightmare is the only word to describe the current state of global equity markets. The Dow Jones has now plunged more than 28% from its Feb 12 peak of 29,551.42, hitting 21,200.62 on Thursday, the day after the World Health Organization declared Covid-19 an official pandemic.
Though the number of cases in the United States is not particularly high, the number around the globe has risen quickly, especially in European countries led by Italy. As of Thursday, the virus was affecting 127 countries, and total infections were almost 135,000 with nearly 5,000 deaths.
The US Federal Reserve set the tone for central bank responses to the outbreak with an emergency rate cut of 50 basis points in early March, bringing its policy rate down to a range of 1% to 1.25%. While this move came as a surprise to the market, it was justified as a counter to the expected weakening in the economy. Still, the markets have yet to be calmed, with worries about the economic impact of Covid-19 growing beyond expectations.
Amid the turmoil this month, the SET index has been hammered, closing at 1,114.91 points on Thursday, a 29% nosedive from the end-2019 close of 1,579.84 points. The second week of March was particularly painful, with two days of 100-point drops. Turmoil reached new heights on Thursday, when the SET triggered its circuit-breaker for the first time since 2008 after the index fell more than 10% during trading hours, ending the day down 134.98 points (10.8%).
Yesterday the index sank 110 points at the opening, triggering the second circuit-breaker in as many days. It subsequently fell as low as 970 points, then raced up to 1,163 before easing back to close at 1,128.91. Counting this week, there have been only five times in Thai market history that trading has been halted.
EARNINGS SUFFER
It's safe to say the public panic surrounding the virus outbreak is now affecting the investment environment more than we had expected. We believe that earnings of listed companies will be significantly affected by the suspension of activities, events and public gatherings around the world, most prominent being tourism, as well as the "closure" of China to fight the virus.
We have revised our overall 2020 earnings per share (EPS) forecast for the market to 80 baht, down 20% from our previous forecast. We also note that the market's current price/earnings (PE) ratio is about 14, already one standard deviation below its average level. As well, we recently revised our GDP growth forecast for 2020 to 0.8%, which would be the lowest in nine years.
Though our base case sees the current market malaise as temporary, further revisions are possible should Covid-19 and the impact of the local drought worsen beyond expectations.
We are encouraged by data showing that new cases in China have fallen steeply, and we expect infections to peak in the first half, followed by a fairly quick recovery in the second half. We still expect the EPS for the market to jump back to 100 baht on 2021 and note that the SET forward PE ratio is only 11 times, the lowest level since the global financial crisis of 2008.
Indeed, we believe the market is now oversold. Many stocks are now trading well below their fundamental value. It's also important to note that many stocks are on their way to XD with yields already exceeding 8-9% amid the stock price plunge. Though severe, the impact from the outbreak should prove temporary and be followed by a rapid recovery.
Hence, we recommend investors start accumulating stocks that have been caught up in the recent sell-off despite having good fundamentals and limited exposure to the outbreak. Companies that fit the description and benefit from domestic-driven income include AOT, BAM, BTS and CPALL.
The tourism sector stands to surge when the outbreak eases, as demand for travel is now pent-up; this should directly benefit AOT later in the year.
CHEAPER ASSETS
For BAM, weak economic conditions mean the company should be able to accumulate assets at cheaper prices. But if the recovery is fast, BAM also benefits because it can liquidate assets quickly. Moreover, its current price level is well below its total asset value.
Meanwhile, openings of various mass-transit routes are slated for the near future, keeping the outlook bright for BTS. The virus outbreak has affected the company's operations as people avoid crowded areas, but we believe that the stock's comeback will be strong once the virus is contained and confidence is restored.
In the domestic consumption market, CPALL retains a strong position. And now that it has a 40% stake in Tesco Asia, the door is open for the company to expand further and become a leader in both the convenience-store and hypermarket industries.
We acknowledge some market concerns that the Tesco Lotus deal will result in CPALL having to increase its capital. However, with only a 40% stake the company can fully finance the deal through debt instruments, and thus has no need to increase capital. Shares are now ripe for gradual (not rapid) accumulation, as the current market downswing has brought valuations down to an attractive level.
