Investors hold their breath

Investors hold their breath

Successful development of a Covid-19 vaccine has the potential to boost capital markets

SCB Securities predicts volatility for the stock market in the second half of the year. Pornprom Satrabhaya
SCB Securities predicts volatility for the stock market in the second half of the year. Pornprom Satrabhaya

Confidence in the rapid development of a Covid-19 vaccine is making some investors bullish on stock prices for the second half of the year, while other analysts warn of turbulence and volatility ahead and suggest playing a defensive investment strategy.

Key vaccine developers have already started final Phase 3 testing, which should limit the downside to the Stock Exchange of Thailand (SET) index in the near term despite the ongoing surge in new Covid-19 cases worldwide and expensive valuation of the SET index at 21 times this year's price-to-earnings ratio, said Sunthorn Thongthip, a strategist at Kasikorn Securities (KS).

"The SET index target reflects a 75% probability of a successful vaccine being developed, the key factor that dictates our stock picks at this time," he said.

KS predicts the SET index to rise to 1,450-1,460 points over the next 6-12 months.

Despite Thailand successfully containing the outbreak with only 0.02 infections per 100,000 people and domestic activity recovering after lockdown measures, the country is still desperate for a vaccine -- the key condition to finally reopen borders to international tourism.

The economy is dependent on revenue from inbound tourists, who account for 12.5% of Thailand's nominal GDP (2 trillion baht a year). Without a vaccine, it will be difficult for Thai tourism to return to normal and the effects of the industry's withering will have an indirect impact across sectors and related supply chains.

"We are in the same boat with other countries combating surges of Covid-19 infections, such as the US, which recently saw the seven-day total for new cases per 100,000 people rise to 81," Mr Sunthorn said.

"We maintain our view that US-China tensions will re-emerge once Washington is able to bring the Covid-19 crisis under control, very likely via a successful vaccine development," he said. "Failure to produce a vaccine and the re-emergence of US-China tension remain our key risks."

The second half of 2020 will likely mark a yearly low for the performance of all asset management companies.

KS expects the supply of non-performing loans (NPLs) and non-performing assets to surge in this year's final quarter and into next year's first quarter, which will provide an opportunity to build portfolios.

"We expect the performances of retailers to bottom out in this year's second quarter, and investors are looking forward to normal years ahead supported by store reopenings, 400 billion baht of government stimulus to boost GDP growth and the government's campaign to encourage local tourism in the second half," Mr Sunthorn said.

A resurgent wave of Covid-19 in the US is a major risk factor for the global economy.

MAKE OR BREAK

The successful development of a Covid-19 vaccine should lead to a broad-based rally in Thai stocks, KS said.

Analysts' investment recommendations for the long term are a rubber glove maker, STGT, and stocks that will benefit from the development of a vaccine such as CPN, MINT, BBL, SPRC and BDMS.

In the second half, the market expects NPLs in the banking sector to increase, benefiting distressed-asset management firms like BAM and CHAYO.

KS recommends investors buy cyclical plays that should outperform the SET, including AOT, BAFS, MINT, ERW, AAV, SPRC, TOP, PTTEP, KCE, HANA, MAJOR, AMATA, JWD, CPN, LH, CRC, SCB, TISCO, KKP, KTC, TKN, BH, BDMS, IMPACT and BTSGIF.

But failure to develop a vaccine would result in a negative market reaction, shifting expectations from a V-shaped recovery to an L-shaped rebound because of the long-lasting economic impact, KS said.

In this case, KS would recommend investors move into more defensive plays in local and global stocks, such as telecom, food/beverage, asset management, independent power generation and medical supplies. These names include STGT, STA, ADVANC, BAM, JMT, CHAYO, CPF, RBF, CPALL, BJC, COM7, CBG, EGCO and RATCH.

Researchers show samples of the Covid-19 mRNA vaccine. Analysts say successful development of a vaccine should lead to a broad-based rally in Thai stocks. Nutthawat Wicheanbut

RISKY BUSINESS

SCB Securities (SCBS) said the market in the second half remains volatile. For the third quarter, investors should explore defensive portfolios, focusing on stocks with valuations aligning with economic fundamentals and growth stories tying in with the new round of economic growth, as well as cyclical stocks with lower expectations.

SCBS forecasts the SET index to hover around 1,430 points in 2021.

SCBS managing director for research Sukit Udomsirikul said that with lockdown measures easing around the globe, economic activity has slowly resumed amid signs of recovery.

With support from central banks, the manufacturing sector is expected to return to normal in the fourth quarter this year, while the service sector will not fully recover, SCBS said.

If a vaccine is discovered, the worst should be over; but Thailand and Europe may experience slower recoveries compared with the US and North Asia, where a lower portion of revenue is from the service sector, Mr Sukit said.

SCBS recommends investment in ADVANC, BBL, BCH, ERW, HANA and IVL.

Mr Sukit said the major risk factor for the global economy is fewer government economic stimulus measures, especially in the US.

Money markets worldwide have lately switched to risk-on mode because of the Fed's policy rate cut to 0% and quantitative easing measures allowing unlimited purchase of bonds by the US government, he said.

A resurgent first wave of Covid-19 in the US is another risk factor, with cases rising rapidly in a number of southern states.

But a potential cold war between the US and China, believed to be gradually forming, may pose the biggest obstacle to economies and investment in the future, Mr Sukit said.

The risk has been elevated by the US urging China to import more American goods, the renewed ban on Huawei and ZTE for another year, and new legislation passed by Congress empowering the US government to revoke the registration of Chinese companies from stock exchanges if they fail to conform with regulatory requirements.

A passenger is checked for signs of fever before entering the Mor Chit main bus terminal. Thailand has been quite successfully in containing the Covid-19 outbreak. Pattarapong Chatpattarasill

BACK TO BASICS

Saharat Chudsuwan, head of marketing and wealth advisory at Tisco Asset Management, said Tisco's investment strategy for the medium and long term remains focused on the rise of the global technology and digital healthcare sectors, a trend that will continue for 5-10 years.

Domestic stocks are still pressured from the economic slowdown and weak tourism and may not recover until a Covid-19 vaccine is successfully developed, he said.

Gold also has upside prospects in the medium and long term as a hedge against the weak global economy. As the pandemic keeps the economy sluggish, interest rates and inflation will remain low.

Mr Saharat recommends avoiding investment in bonds because of meagre returns with low rates until an economic recovery happens.


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