Q3 profit-taking sell-off on the cards

Q3 profit-taking sell-off on the cards

Stock rally doesn't mirror fundamentals

The local stock market's rally is not reflective of Thailand's economic fundamentals or the performance of SET-listed companies, making a profit-taking sell-off highly likely in the third quarter, says an academic.

Economic activities have begun to expand this month after the third of four stages of lockdown easing, with a V-shaped recovery seen in Thailand's financial market, said Asst Prof Anusorn Tamajai, director of the Economic and Business Research Center for Reform at Rangsit University's Institute of Economics.

The recovery signals net foreign inflows moving into the domestic stock market, helping to shore up a recent rally in the SET index.

Foreign investors sold a net 193.4 billion baht in Thailand's two bourses during the first five months as the coronavirus pandemic ravaged countries worldwide. But net foreign inflows into local equities have been seen recently, with month-to-date net inflows worth 5.2 billion baht in the stock market.

Although the SET index could rise to 1,480 points soon on the back of continuous fund inflows, such a rally is seen as a short-term profit-taking speculation by foreign investors instead of confidence stemming from the country's economic fundamentals or projected earnings of SET-listed firms, Asst Prof Anusorn said.

The price-to-earnings (P/E) ratio of Thai stocks has risen beyond equity fundamentals, while there is a high risk of an equity sell-off for profit-taking before second-quarter earnings are released in the third quarter, he said.

The P/E ratio of the SET index stands at about 20, compared with last year's corresponding period when it was 18.6. Year-to-date return from the Thai bourse is -9%, compared with -8.3% and +3.2% for returns over the last six and three months, respectively.

Some 671 SET-listed companies reported a 60.5% year-on-year plunge in first-quarter aggregate net profit to 98.5 billion baht, with energy and petrochemical businesses suffering from the oil price war.

A V-shaped recovery in Thailand's stock market, however, is not tantamount to an economic recovery, since the number of unemployed people is rising and many small businesses have shuttered during the virus crisis, Asst Prof Anusorn said.

Offshore capital inflows will also exacerbate the flagging export sector through the baht's appreciation, potentially resulting in worsening job prospects in the manufacturing sector, he said.

After the MSCI index adjusted its weight for local equities on May 29, foreign investors continued to buy Thai stocks for four straight days, while other regional bourses also saw an influx of offshore fund inflows, said Padon Vannarat, head of research at Yuanta Securities Thailand.

The reasons were excess liquidity and expectations of an economic recovery, Mr Padon said.

"Therefore, foreign capital inflow during this period is not unusual," he said.

Mr Padon said predicting future capital inflows and outflows is difficult for now because foreign investors have been investing through non-voting depository receipts (NVDRs).

By investing in NVDRs, foreign investors receive the same financial benefits, such as dividends, right issues or warrants, as those who invest directly in a company's ordinary shares. The only difference between investing in NVDRs and company shares is with regard to voting.

Despite an anticipated sum of 10-15 billion baht in foreign inflows into local equities this month, these inflows may not support the SET index that much, given the higher P/E ratio, while the baht is no longer viewed as a safe-haven currency because of the ailing tourism sector, Mr Padon said.

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