Higher risk from the prospect of a liquidity drop is expected to cause volatility in the capital and money markets as an increase in US inflation and bond yields has signalled the country may be planning to taper its quantitative easing (QE), says Sukit Udomsirikul, managing director of research at SCB Securities (SCBS).
Mr Sukit says the third wave in Thailand may drive analysts to revise their 2021 economic growth forecasts.
The outlook for the Thai economy and the stock market remains dim for the second and third quarters, with the reemergence of the virus hampering recovery in most sectors.
The implementation of QE increased liquidity in the market, causing asset prices to rise over the past year, even during the Covid-19 crisis.
However, as the economy shows signs of recovery, namely increases in the inflation rate and bond yields, the US government may decide to taper QE, causing prices to drop based on decreased liquidity.
Investors have high expectations for economic stimulus measures and vaccine rollouts to expedite economic recovery, as speculation on stocks is pronounced, he said.
If the economy recovers, the government will reduce the use of stimulus measures in both monetary and fiscal policies, while inflation and bond yields are expected to begin rising from the second quarter, said Mr Sukit.
All of these factors have the potential to increase volatility in the financial markets, he said.
Mr Sukit said the third outbreak may drive analysts to revise their 2021 economic growth forecast, which is currently in the 2.7-3% range.
However, he still believes domestic consumption and exports will continue to grow thanks to stimulus measures and the global economic recovery, though the tourism sector is expected to recover slower than expected.
The latest outbreak will have a greater impact on the economy than previous rounds, especially on restaurants, land transport businesses such as electric trains, tourism and retail, said Mr Sukit.
SCBS estimates tourism operators and land transport businesses will continue to suffer losses in the first half this year because of the decrease in passenger volume.
Meanwhile, returns from the Thai stock market this year should be in line with earnings of listed companies, said the brokerage.
Listed companies' earnings per share will grow 46% and 21% in 2021 and 2022, respectively, said SCBS.
The brokerage recommends investing in smaller stocks with higher growth potential rather than large stocks during the pandemic.
Its investment strategy for the second and third quarters is to focus on secure stocks.
SCBS expects the pandemic situation will improve by the fourth quarter after mass vaccinations, recommending investors gradually adjust their portfolio with a focus on stocks with high growth potential and a capacity for competitiveness.
Another suggestion is stocks likely to benefit from the reopening of the country, said Mr Sukit.