The SET50 index has risen by 24.3% so far in November, outperforming the sSET and SET indices, which have increased by 12.6% and 18.9%, respectively. This is in line with our view that large-cap stocks should outperform their small-cap peers in light of the US election results.
Joe Biden's victory should support the movement of global fund flows out of the US and into Asian markets amid reduced uncertainty about a trade war as his Democrat administration will focus more on diplomacy and cooperation in areas of mutual interest between the US and China.
As well, Mr Biden plans to push through more stimulus amid the pandemic, undo some of Donald Trump's corporate tax cuts and introduce other legislation seen as less market-friendly.
In addition, Thailand should be one of the key beneficiaries of the availability of a Covid-19 vaccine given that its tourism sector accounts for about 22% of GDP. As all of the listed tourism stocks are categorised as large caps, this is one reason why large-caps have outpaced small caps in November.
Note that foreign investors have been net buyers of 37 billion baht for the month to Nov 27, although they remain net sellers of 262 billion baht worth of Thai shares for the year to date.
Given that small caps (sSET) have outperformed large caps (SET50) since the market rebound from the Covid-19 crash during April to October, creating a wide price gap of 36% between the two, it makes sense that large caps will outperform over the remainder of 2020. We recommend investors to be cautious and select only small-cap stocks for which specific catalysts to further gains can be seen.
VACCINE BOOST
On the vaccine front, Pfizer and its German partner BioNTech have concluded their Phase 3 study, meeting all primary efficacy targets with 90% effectiveness. US-based Moderna has also reported 95% efficacy for its vaccine in preventing Covid-19, including severe cases. Also showing promising trial results are vaccines developed by Oxford-AstraZeneca -- of which Thailand has ordered 26 million doses -- and Russia.
We expect more successful Phase 3 vaccine test results and US Food and Drug Administration approval in the next one or two weeks to fuel a broad-based SET index rally, particularly in domestic cyclical stocks (big banks, property), global cyclical stocks (oil and gas, refineries and petrochemicals), tourism stocks (airports, aviation, hotels) and commercial property.
In contrast, we expect some profit-taking in the electronics, agribusiness, packaging and rubber glove sectors, which have been key beneficiaries of Covid and delivered positive returns.
With a "return to normal" theme, we expect the sectors negatively affected in 2020 by Covid-19 to continue to outperform the market in the rest of 2020 and 2021. These stocks are also trading at a discount to their valuation bands. Our preferred themes and top picks are:
- Vaccine plays (BBL, CPN, MINT, AAV, AMATA, PSL, SPRC and TOP). Successful vaccine development should lead to a broad-based rally in Thai stocks, especially those that were hit hard by the original outbreak. Another interesting characteristic of these stocks is their prices have been underperforming and they are trading at a discount to their valuation bands.
- Provincial plays (MTC, DOHOME and CBG). Domestic farm income should recover on better crop yields, supported by adequate rainfall. This will benefit stocks with a high exposure to provincial consumption.
- Hedging against a potentially steepening Treasury yield curve (BLA). In the medium term, we see potential for the yield curve to steepen on higher bond supply due to the government's major spending programmes and revenue shortfalls. This will benefit BLA on higher investment income, while removing the risk of additional reserve expenses for the insurer.
- Turnaround plays (PR9, SAT and SRICHA). We expect PR9's earnings to rebound in 2021-22 on better volume and cost savings. SRICHA's earnings should turn positive in 2020-21 on its high-quality backlog. SAT's 2021 earnings should rise on higher auto output thanks to the economic recovery.