Cautious optimism building on the SET

Cautious optimism building on the SET

Thai shares have been trading in a range between 1,610 and 1,640 points in recent days. The SET shot up early in the week to 1,640 before a correction kicked in after a more hawkish tone from the US Federal Reserve triggered a sell-off in global risk assets.

We expect the SET to move in sideways mode and consolidate around 1,580 to 1,600. More hawkish signals from the Fed will pressure regional equities but there is no need to panic. We reiterate a selective buy strategy, focusing on reopening plays with tendency to outperform the market.

Positive factors: Prime Minister Prayut Chan-o-cha has announced a concrete plan to reopen the country in mid-October and assured that all of the 105.5 million doses of coronavirus vaccine procured by the country will be delivered to accommodate the reopening plan.

The SET could see further upside, fuelled by value and laggard stocks that have already factored in the impact of the third Covid outbreak. The price/earnings (PE) ratio of the broad market will remain elevated above its normal trading band, as bond yields remain low (so far).

SET target 1,605: Our base-case year-end target of 1,605 for the SET is pegged to a 10% discount (cost of equity) from our year-end 2022 target of 1,784, which implies earnings per share (EPS) of 98 baht and a PE ratio of 18.2 times, or 1 standard deviation (SD) above the 10-year mean.

Our EPS forecast of 83 baht for 2021 is roughly in line with local analysts' consensus of 81.15, while our 2022 forecast of 98 baht is slightly above the consensus number of 95.30.

Our base-case scenario assumes a steady macroeconomic recovery as vaccines become more widely available from the third quarter onward, no intensification of global conflict (trade or geopolitical) under a Biden administration, and no substantial divergence of oil prices from our base-case assumption of about US$68 a barrel for Brent crude.

Our bull-case scenario puts the year-end 2021 target at 1,694, or 5% below the 2022 target of 1,784. It reflects greater market optimism over the outlook for 2022, when inbound tourism should more-or-less return to normal.

Effective government economic measures and fiscal disbursement, a full recovery from Covid (domestic and abroad), no other economic shocks, and only a moderate uptrend in bond yields (no signal from the Fed on tapering or a higher policy interest rate) are the key factors that would be necessary for our bull-case scenario to play out.

Negative factors: The outcome of this week's Fed meeting was more hawkish than the market had anticipated. The Fed's own "dot plot" survey now suggests two interest-rate increases by 2023. (In March, the Fed signalled there would be no movement until 2024.)

The US central bank's economic projections also anticipate higher-than-expected inflation. Fed chairman Jerome Powell did not send any signal on tapering of bond buying, but acknowledged that officials were ready to start talking about it. More clarity is expected from the next meeting in late July.

The shift in the Fed outcome triggered consolidation in US stocks. However, investors apparently realised that tighter monetary policy going forward is in alignment with the solid US economic recovery. Therefore, recent consolidation in stocks and other assets (such as oil and gold) did not cause any panic.

Mind the gap: Equity yield gap valuations for 2021 remain moderately expensive. Earnings forecast upgrades for Thai stocks in recent months have pulled the equity yield gap back into moderately expensive space (0.82 SD below the mean for the SET against the Thai 10-year bond, versus expensive space of 1.4 SD below the mean), even as the SET has soared to new year-to-date highs.

Investor optimism over the post-Covid macro recovery and further scope for earnings forecast upgrades in the second half may keep the SET airborne well into the third quarter until bond yields rise further.

A rise of 30 and 50 basis points more, respectively, to bond yields would imply an expensive SET at 1,676 and 1,614 points, respectively, based on the current forecast 2021 earnings per share.

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