Slow but steady earnings climb begins
With greater confidence in the success of Covid-19 vaccine development, we have set a 12-month SET index target of 1,460 points, representing a 5% discount from a bottom-up target of 1,536. Our target reflects a 75% probability of successful vaccine development (target 1,543 points) and a 25% weighting for positive market response to lockdown measures and the absence of a second wave of infections in Thailand (target 1,250).
The Thai stock market has recovered more than 30% from its March 23 bottom and is trading above the 1,300 mark on optimism over the prospects for economic recovery, earnings of listed firms and vaccine development. Kasikorn Securities expects the aggregate second-half earnings of Thai listed companies to bounce 81% from the first half after bottoming out in the second quarter, when the bottom line tumbled 47% year-on-year.
But we expect second-half earnings to still be down 21% from the second half of 2019, reflecting a sluggish recovery in the service sector (which hinges largely on inbound tourists), due to delays in the travel bubble programme amid second-wave outbreaks in several countries.
Successful vaccine development is a crucial factor that could support the return of international tourists. Revenue from inbound tourism accounts for 12.5% of Thailand's nominal GDP.
Overall market earnings will likely return to pre-pandemic levels in 2022, as we expect foreign tourist arrivals to rebound from a low of 8 million in 2020 to 24 million in 2021 and 36 million in 2022.
We assume that a vaccine will be approved in the fourth quarter and that Thailand will receive the first lot of vaccine for public use by mid-2021. We also believe that the country will be able to accept foreign tourists without quarantine measures again in 2021.
Kasikorn Securities estimates that full-year earnings of Thai listed companies in 2020 will fall 39% year-on-year before bouncing back by 42% in 2021 and extending gains by 18% in 2022.
As the earnings uptrend drives the stock market further north in 2021, sectors severely hurt by Covid-19 -- tourism, transport, cinemas, banks and finance firms, property, commerce, industrial estates and healthcare -- will likely outperform the SET index after lagging substantially in 2020. Expect outstanding performance recovery for these sectors in 2021-22, barring any new setbacks.
Supportive factors for the Thai bourse in 2021 will include ample liquidity in the financial system amid accommodative monetary policies of central banks worldwide, a trend that will likely persist for at least one or two more years. The US Federal Reserve has already signalled no rate increase until the end of 2022 at the earliest, while Kasikornbank expects the Bank of Thailand to maintain its record-low policy rate of 0.50% until at least the end of 2021.
Also propelling stocks will be additional fiscal stimulus, as the Thai government still has more than 750 billion baht available from the 1-trillion-baht borrowing decree. It plans a budget deficit of 469 billion baht for fiscal 2020 and a 623-billion-baht deficit in fiscal 2021, which starts on Oct 1 this year.
Finally, valuations of Thai shares remain modest. Based on estimated 2022 earnings per share (EPS) of 96 baht (on a par with 2019 levels pre-Covid), the forward price/earnings (P/E) ratio will be a mere 13.5 times, close to the 10-year average.
Among negative factors that could undermine SET recovery prospects in 2021 are a slower-than-expected global economic recovery due to US-China trade and tech conflicts, regardless of who becomes the next US president, and domestic political turmoil.
Although Thailand has always been exposed to political risks, rising tensions could upset government stability and weigh on the SET, leading the market to trade at a discount of -1 standard deviation from the forward P/E at 12 times, as it did during the anti-government protests that began in late 2013 and culminated in the May 2014 coup.
Another risk could be any signals from the Fed that it might be preparing to cut back on monetary easing -- the so-called taper tantrum -- which would push up yields of global and Thai bonds. This may trigger profit-taking in equities amid a narrowing earnings yield gap between Thai stocks and bonds.
The Thai stock market started to respond to encouraging Covid-19 vaccine news after Russia announced its success in mid-August. We detected rotation into stocks that stand to benefit from a vaccine (tourism, transport, media, banks, finance and commodities), and they outperformed the SET index.
We also noticed profit-taking in stocks that delivered robust second-quarter earnings and those of businesses whose earnings could be adversely affected by vaccine development, such as rubber gloves.
We anticipate further stock rotation and recommend two strategies:
- Selective buying of stocks with clearly visible catalysts or improved fundamentals and bright earnings prospects in the second half: CBG, RBF, JMT, CHAYO, COM7, DOHOME, BGRIM, GULF, PTTGC, SPALI, PTG, ASIAN and SRICHA.
- Stocks poised to respond positively to any announcement of third-phase vaccine test results next month: AOT, MINT, AAV, CPN, MAJOR, AMATA, TKN, M, BBL and TISCO.
Sunthorn Thongthip is senior vice-president of Kasikorn Securities Plc.