If Covid has peaked, look for reopening bounce
Thai shares rebounded in the past week from our projected support level at 1,515 points (200-day moving average) on hopes that the domestic Covid-19 emergency may have peaked as the number of discharged patients is close to or higher than new daily infections.
We expect the SET Index to move sideways and consolidate around the 1,550 mark in the coming week. Stock rotation will likely make the market relatively stable. Deeply discounted stocks probably have largely reflected weak second-quarter earnings and third-quarter outlooks. But any positive catalyst -- hopes for lockdown easing, high third-quarter earnings growth, or results bottoming out -- could turn them into outperformers.
After more than a month of stricter outbreak prevention measures, new Covid cases locally seem to have peaked (new cases were below the seven-day rolling average for the past three days). Stocks that have seen notable dips during the past month in response to the tighter controls could anticipate similar rebounds over the coming months.
Commodity plays (such as Chemicals and Refineries) could also see some upside moving into the high season but might be capped by lingering doubts over demand momentum (as many countries have likewise seen resurgences in Covid cases) and new sources of supplies.
Our base-case year-end SET target is 1,605 points, a 10% discount to our 2022 year-end target of 1,784, pegged to a price/earnings (PE) ratio of 18.2 times and earnings per share (EPS) of 98 baht.
Looking at price patterns during the latest rounds of local Covid outbreaks in January and April this year, rebounds were seen in firms expected to gain from reopening, with similarities in sectoral performance. Sectors affected by the local outbreak saw rises and falls in tandem with outbreak and reopening themes. Commodity stocks seemed to follow global commodity prices rather than local Covid cases.
The latest wave of Covid, which has escalated during the past two months, has slammed companies with higher exposure to slowing business activity. Many stocks affected by this more severe outbreak have slid as much as 25% from mid-June to mid-August.
Signs of slowing new infections and growing expectations of business reopening could make for decent price rebounds among stocks that have been sold down during the Covid panic period, such as Tourism, Transport, Industrial Estates, Retail, Restaurants, Banks, Property and Media.
We have seen slowing momentum in earnings forecast upgrades by local analysts over the past two months, with sectors subject to upgrades for 2021 and 2022 outnumbering those subject to downgrades. The most notable downgrades have been in sectors directly affected by stricter outbreak control measures and their impact in business activity. The Energy & Chemicals and Healthcare sectors were among the top recipients of earnings forecast upgrades.
Confidence in a business recovery after reopening could strengthen the prospects for profit forecast upgrades towards year-end.
Our 2021 EPS forecast for the SET of 83 baht (and 98 baht for 2022) is below the consensus projection of 85.40 baht for this year and 96.10 baht in 2022.
Among risk factors, speculation is mounting that the US Federal Reserve could start scaling back its massive stimulus as soon as late this year.
Investors expect to hear more clarity when the Fed holds its annual symposium in Jackson Hole, Wyoming from Aug 26-28.