More sectors ready to ride recovery wave
The SET moved sideways this week. There were no negative surprises from the US Federal Reserve after its policy meeting, which supported the prices of risky asset classes.
The Fed will maintain its bond purchases at US$120 billion a month and keep its benchmark interest rate near zero, with no increase expected until 2023 at the earliest, even though expectations of higher inflation are building.
We expect the SET to move within the range of 1,560 and 1,600 points in the coming week. The market is already pricing in macroeconomic normalisation in the wake of Covid vaccine rollouts, even though an earnings recovery is still some way off for tourism-related industries. The SET price/earnings (PE) ratio will remain above its normal trading band.
Rising bond yields may put pressure on the equity market in the short run as the equity yield gap is squeezed further. Nonetheless, downside risk appears modest, as improving fundamentals will remain supportive of further market upside in the second half of 2021.
Our base-case year-end SET target is 1,605 points. That's a 10% discount from our year-end 2022 target of 1,784, pegged to a PE ratio of 18.2 times, implying earnings per share of 98 baht.
Positive factors: We expect the SET to deliver a year-on-year earnings jump for the first quarter, given the low base set by the first quarter of 2020, when energy and chemical firms recorded significant inventory losses.
The sectors most likely to post growth are Electronics (higher revenue, fatter margins), Food (sales and margin expansion for both meat producers and beverage firms), Energy/Chemicals (fatter petrochemical spreads, higher oil and petrochemical product prices), Construction Materials (SCC's chemical inventory loss in the first quarter of 2020 dragged down the sector), Industrial Estates (more land transfers), Media (recovering revenue, effective cost controls), and Insurance (higher return on investment for BLA, strong growth for TQM).
The good outlook for economic recovery and vaccine availability open wider scope for sector picks among global cyclical, value and laggard plays. Earnings quality remains important, but shares might not outperform in the short run unless instances of profits beating expectations prompt analysts to upgrade forecasts. Our preferred themes for the second quarter are:
- Global demand recovery, supported by vaccine availability: As we move into the recovery phase, Oil & Gas, Refineries, Chemicals and Tourism look good to trade.
Higher year-on-year oil and petrochemical prices and fatter spreads (up by 10-25% for the year to date) are likely to continue into the second quarter of 2021 for many products.
As well, a fatter gross refining margin (GRM) this year bodes well for refineries. The Singapore GRM was negative for several months in 2020 and averaged just 40 cents a barrel for the full year.
Even though tourism may take longer to recover materially, more widespread vaccine availability should lift tourism-related stock prices way ahead of actual earnings recoveries.
- Value and laggard plays: Easing economic risk in the recovery phase should put value stocks -- for which risk factors have been largely priced in -- back on the table. Any stocks still discounted to pre-Covid levels are likely to see more upside in the coming months than those that have already performed well on stronger fundamentals.
We prefer Banks (economic recovery, pre-emptive debt restructuring, lighter loan-loss provisions likely this year), Consumer Goods and Restaurants (recovering demand) and Healthcare (recovering demand, both domestic and foreign), Industrial Estates (fewer restrictions on fly-in investors will enable the release of pent-up land bookings and sales), Residential Property (core demand will enable some developers top record growth for 2021; several pay good dividends) and Construction Materials (demand recovery, fatter margins).
Negative factors: The equity yield gap for 2021 has hit expensive territory. The current SET gap (versus the Thai 10-year bond) of 2.85% is 1.44 standard deviations below the mean since 2010. (Anything less than 2.9%, or 1.4 SD below the mean, is considered expensive.) But the yield gaps against shorter tenors range from 0.9 to 1 SD below the means (expensive territory is 1.2 to 1.3 SD below the means).
Higher bond yields may cap the scope for upside on the SET in the short run. However, the prospects for earnings forecast upgrades later this year probably limit the downside risk to the market.