The SET Index moved sideways this week, correcting at the beginning of the week after it hit a high of 1,500 points, and rebounding afterwards.
Investors responded positively to Wednesday's US Federal Reserve statement, which remained supportive as expected. At its final meeting of the year, it affirmed its commitment to continuing quantitative easing of US$120 billion per month ($80 billion for purchases of US government securities and another $40 billion for mortgage-backed securities).
We expect Thai shares to continue in the sideways/sideways up pattern for another week, with news of vaccine development and rollouts a significant factor.
Going forward, the market uptrend will be supported by low bond yields (a significant equity yield gap), the ongoing economic recovery, vaccine rollouts, further fiscal stimulus to encourage consumer spending, and liquidity injections among major global central banks. We expect further foreign fund inflows to emerging markets, especially those with more attractive valuations.
Among the positive factors, foreign inflows are supporting the SET uptrend. The historical correlation between foreign buying and selling and monthly SET movement remains positive at 0.49, based on a six-month rolling correlation of monthly data. This is far better than the correlations for retail trading (-0.57), institutional investors (-0.15), or proprietary trading by brokerages (0.31).
If we count only the months of foreign net buying, the likelihood of the SET posting a positive month-on-month return is even higher at 84%, based on data for 2000-20.
Also supporting the market is an attractive equity yield gap, which is expected to remain near the long-term mean for 2021. The SET's current equity yield gap (versus the Thai 10-year bond) of 4.09% for 2021 is still 0.04 standard deviation (SD) wider than the mean.
A shallow uptrend in bond yields (assuming modest reflation into 2021 amid a sustained low policy interest rate) should not diminish the attractiveness of the SET yield gap. A 50-basis-point rise in bond yields would merely bring the gap into moderately expensive territory (0.3 SD below the long-term mean versus the expensive threshold of 0.7 SD below the mean).
Meanwhile, consensus earnings-per-share (EPS) forecasts for 2021 appear to have found bottom during the past couple of months. They should start rising next year, as the economic outlook strengthens once Covid vaccines become widely availably globally.
Many firms have cut costs effectively during the second and third quarters of this year. Consequently, we expect costs to remain subdued into next year, while the top line will rise substantially.
Our base-case year-end 2021 SET target is 1,548 points, reflecting a price/earnings (PE) ratio of 18 times and EPS of 86 baht. Further upside would be more likely to come from a valuation re-ratings (driven by fund inflows) than from upgrades to our EPS forecast, which is already ahead of the consensus.
RECOMMENDED SECTORS
We recommend a focus on cyclical growth, value and laggard plays in the first quarter of 2021. Anticipation of widespread Covid-19 vaccine availability by mid-year will support cyclical growth (demand recovery, value and laggard plays (fewer risk factors in stock prices). Among the sectors, we prefer Oil, Gas and Chemicals (TOP, IVL), Construction Materials (SCC), Banks (BBL, SCB, TISCO) and Residential Property (LH, SPALI).
Expectations of substantially more foreign visitor arrivals will benefit Healthcare, Tourism and Industrial Estates. A sub-theme for dividend season is bank and residential property stocks that have remaining dividend yields exceeding 3%.
The earnings quality theme remains important, but may take a back seat in the short term, as secured bottom-line plays have already performed well for the year to date.
Consensus profit forecast upgrades could reignite interest in stocks receiving such votes of confidence.
Among potential risk factors, we are most concerned about a tepid economic recovery that fails to meet market expectations, sub-par Thai government economic policy implementation, falling oil prices, geopolitical/trade conflict, and a steep rise in bond yields.