Investors adjust to 'new normal'

Investors adjust to 'new normal'

The world continues to grapple with the fallout from the spreading coronavirus, with total cases exceeding 7.5 million and deaths above 421,000 as of yesterday. On the positive side, the number of people recovered now exceeds the number of active cases. The US remains the most affected country, with more than 2 million cases and nearly 114,000 deaths.

Forecasts call for a deep pullback in the global economy this year as businesses are swallowed up and GDP in countries around the world contracts. Nevertheless, stock markets worldwide have been approaching new highs, shrugging off the impact of the pandemic.

Federal Reserve chief Jerome Powell delivered a reality check on Wednesday, cautioning that the US economy faced a long road to recovery. Before his remarks, the Dow Jones index had climbed 46% from its bottom in March, nearing its pre-pandemic level.

The SET index also powered above 1,400 points in early June, up 46% from its bottom in March, before correcting in line with the global share sell-off of the past few days.

We believe the market is reacting to several "new normal" assumptions. First, investors are looking beyond this year, believing the crisis is approaching its end with vaccines expected to be ready by the end of 2020. Investors expect normalisation in 2021 and believe that the world is now better able to handle the virus.

Secondly, as bond yields are now hovering close to zero, it is exceedingly difficult to get returns from the fixed-income market. Thus, as liquidity floods the world, it shouldn't be surprising that funds are flowing into stock markets.


The SET has been no exception to the trend. The index climbed to 1,330 points in late May and then added another 100 points in early June after foreign funds turned net buyers (net buys reached 12 billion baht in the last eight trading days). This trend is manifesting around the globe, and we believe that the low-interest-rate environment will persist for a few years before rates are able to regain ground.

With the SET flirting with 1,400 points, we see limited further upside potential at this stage. Although the Covid-19 situation in Thailand appears under control, we do not expect corporate earnings to normalise quickly. Even looking ahead to next year's earnings, we see that the SET forward price/earnings (PE) ratio is about 17 times, which is considered high for the Thai market.

Moreover, we are cautious about the impact from the scheduled ending this month of the government's short-term stimulus measures. Given the number of businesses that have closed and industries still at risk, the job market could remain weak for an extended period.

Consequently, there is potential for continued impact on the economy in the third quarter of 2020. Tourism, a long-standing pillar of the Thai economy, is likely to recover only slightly as we head towards the end of the year.

In light of these factors, the stock market appears to be acting more on short-term trading than long-term investment at this stage. Our stock picks for this month boast solid fundamentals and tend to be laggards relative to the broader market. We also like companies with a more secure profit outlook on a two-year horizon. Our picks include AMATA, CK, SCCC and TVO.

We believe that the impact of Covid-19 on AMATA will be limited. Although the industrial estate operator will be hit hard this year (particularly in the first half) by the pullback in investment, the situation is improving in Thailand and we expect investment to creep back later in this year. We expect AMATA's performance to normalise in 2021 with 21% growth in net profit.


For CK, the pandemic has had only limited impact on construction activity, but the curfew has had a material effect, holding back crucial night-time construction activity. But operations should return to normal in the second half, and contractors should be prime beneficiaries of accelerated state spending on megaprojects to boost the economy.

CK's profit will likely drop this year, mainly due to subsidiaries that have seen bigger impacts from the virus and from delays in some projects. On the other hand, CK's 2021 net profit is expected to jump 58% year-on-year from the roll-out of new projects later this year.

SCCC has also been negatively affected as cement sales have fallen after delays at many projects and the shutdown of a plant in April. Nevertheless, these factors have resulted in SCCC becoming a substantial laggard in terms of stock price versus the SET. A dividend yield of 6.3% is another reason to get into the stock.

Lastly, TVO is benefiting from the global slump in soybean prices, as well as from the government's push to increase palm oil usage by promoting B10 diesel with 10% palm oil as B7 is phased out. With these measures draining palm oil supply, demand for soybean oil has increased significantly, pushing up prices.

We expect TVO to be one of the few companies in the market to report net profit growth in 2020, at 17% year-on-year, with a further 5% gain forecast for 2021. Note also that TVO offers a high dividend yield of more than 6%.

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