The SET index has been drifting sideways over the past three months, but we expect a rebound in September towards 1,350 points. The index could break above this level if the outlook improves for Covid-19 vaccinations on a wide scale, which would boost sentiment and business activity worldwide, and thereby corporate earnings performance.
But uncertainty about domestic politics and a second wave of the coronavirus outbreak in the country, which would prolong the closure of borders to international visitors, are major downside risks.
Positive factors: Any development on the vaccine front and a further easing of remaining local restrictions or lockdowns elsewhere should lend support to risky assets.
- Expect more fiscal and monetary measures from numerous countries to shore up the economy, which we believe will further increase liquidity in the global equity market.
- Manufacturing in Thailand remains weak, but the pace of decline has slowed. The manufacturing production index contracted 14.6% year-on-year in July, compared with 17.8% in June, with the electronic component and processed food sectors showing improvement.
- Corporate earnings will be watched closely. We expect the SET index to rebound sharply if a significant number of listed companies signal improvement of their earnings performance for the third quarter, particularly in the financial and tourism sectors.
Negative factors: The Thai economy remains weak overall in the absence of another large-scale economic stimulus package, while the ban on international visitors has taken a severe toll on the domestic economy, which could inflate banks' non-performing loans.
- Domestic political jockeying, the debate over constitutional amendments, and continuing street protests will likely dampen foreign investors' confidence.
- Investors continue to worry about US-China trade tensions, even though both sides have affirmed that their phase-one deal remains on course. Much could depend on how big an issue President Trump and his opponent make of China as they campaign for the Nov 3 election.
- Revised rules on short-selling and revised ceiling and floor limits of securities products traded on the SET, intended to curb volatility, are due to expire on Sept 30 unless regulators decide to extend them further.
The SET index has faced a number of negative factors over the past three years, which have resulted in aggregate net profit falling by 38% from the level seen in 2017. While we believe aggregate net profit will improve in 2021, some businesses will likely continue to suffer losses related to the pandemic impact, while others may recover.
We forecast net profit of the broad market to return to 2017 levels in 2022. Sectors expected to emerge from the current crisis with favourable earnings performance are processed food and beverages, staple products, manufacturers that relocate their production bases to avoid impact from US-China trade tensions, technology and ICT shares, and companies that enjoy unique market positioning or are part of an oligopoly.
September outlook: The SET index appears likely to slip further in the next one or two weeks with a possible break below the support at 1,300. There is also potential for a rebound if good news emerges. Expect a trading range between 1,270 and 1,350, with supports at 1,270 and 1,250 and resistance at 1,340 and 1,360.
Investment strategy: We expect a turning point this month. Investors appear likely to reduce their positions in stocks that have benefited from the Covid-19 outbreak, and increase positions in stocks with strong growth stories and those that suffered during the pandemic and are now poised for a recovery. Among our picks for September:
CK (Buy, target 20.80 baht): The construction contractor's share price has been gaining for three months and outperformed the SET index by 15%. As BEM-CK has high potential to win the Orange Line mass transit project, any further development on the project should lend support to the price.
CRC (Hold, target 30.50 baht): We forecast second-half net profit of the retail group to grow from the first half on expectations of lower operating expenses versus the second quarter, which was due to obsolete inventory, and stronger revenue in the high season.
MINT (Hold, target 22 baht): The hospitality firm's share price outperformed the SET index by 19% in the past month as progress in the development of Covid-19 vaccines stoked optimism about tourism. The stock's valuation, however, remains attractive, trading at 1.5 times price to book value (PBV), which is -1 standard deviation (SD) below its 10-year average. We expect the stock to remain an outperformer as more positive vaccine news emerges.
PRM (Buy, target 12.70 baht): We forecast 2021 net profit to rise 12% to a record high of 1.78 billion baht, based on three assumptions: the floating storage unit business will register 100% capacity utilisation, the domestic oil trading business will return to growth, and PRM will enjoy a revenue contribution from its most recently acquired ships.
SAWAD (Hold, target 53 baht): The lender's share price has underperformed the SET index by 6% in the past month. Regulatory risk and fiercer competition in the retail loan market, notably from Government Savings Bank, are expected to pressure the share price.
SYNEX (Buy, target 16.50 baht): The IT product distributor's share price has outperformed the SET index by 27% in the past month. We forecast earnings per share to rise at a 14% compound annual growth rate over 2020-22 and will likely continue to lend further support to the share price.
TKN (Buy, target 15.40 baht): The snack maker's share price has outperformed the SET index by 7.2% in the past month. The key catalyst is a brighter earnings outlook for the second half of 2020 and in 2021.