Reopening optimism an investment driver
In the past week, Thai shares moved sideways in a range between 1,620 and 1,640 points. Sentiment was bolstered by a proposal to reopen Bangkok from Oct 15 to foreign tourists without a quarantine requirement -- on condition that all districts in the capital achieve 70% vaccination before that date.
We expect the SET to drift sideways up in a range between 1,625 and 1,650 in the coming week. Top picks remain beneficiaries from the Bangkok reopening and speculative plays such as oil-related stocks, refineries, container and bulk shippers as the monsoon season will likely affect refineries, oil rigs and terminals.
Positive factors: The domestic Covid situation has eased, but Thailand might still be vulnerable to another resurgence, given its relatively low vaccination rate. The market has partially priced in a recovery, but there are a handful of stocks that are still trading below their pre-Covid levels. Reopening, value and laggard plays should see more upside in the recovery phase later this year.
Our base-case 2022 year-end SET index target is 1,793 points (with a price/earnings ratio of 18.3 times and earnings per share of 98 baht). Muted concerns over signals from the US Federal Reserve that it's ready to start reducing its stimulus could set the scene for our bull-case 2021 year-end target of 1,704. That would represent a discount by half the cost of equity, 10.4%, from our 2022 target, and is well above our base-case 2021 target of 1,624 (fully discounted for the cost of equity).
Sector preferences for the fourth quarter: Expanding global and domestic vaccination rates should lift investor confidence about the economic recovery in the fourth quarter and into 2022, with clearer skies for the tourism industry expected in the second half of 2022. Our preference remains for domestic plays, especially laggard stocks and firms with earnings recovery potential. Our preferred themes for the fourth quarter and 2022 are:
Reopening, value, and laggard plays: Easing economic risk in the recovery phase should put value stocks -- for which risk factors have already been largely priced -- back on the table. Any stocks still discounted to pre-Covid levels are likely to see more upside in coming months than those that have already performed well on stronger fundamentals.
Among the reopening plays, we prefer: Banks (economic recovery and the extended BoT-initiated debt restructuring schemes will minimise non-performing loans and reduce the need for loan-loss provisions); Consumer and Restaurant businesses (recovering demand after reopening); Industrial Estates (eased restrictions on fly-in investors will enable the release of pent-up land bookings and sales); Residential Property (core demand will enable some developers to record growth for 2021; several pay good dividends); Construction Materials (demand recovery and fatter margins), and Transport (traffic recovery, both ground and air).
Tourism: Tourism-related stocks look good to accumulate, as vaccination rates among major countries have progressed steadily. The step-by-step easing of cross-border tourism will boost sentiment toward tourism-related plays, even though earnings will take a fair time to return to pre-Covid levels.
Commodity plays: Rising demand for refined petroleum products keeps our focus on Refineries (fatter gross refining margins in the second half of 2021 and next year). The Chemical sector is also worth trading in light of heavy seasonal demand, but there's only moderate scope for upside, as the industry-wide production capacity for some petrochemical products is scheduled to rise through the second half of 2021. There would be more upside, however, if some of the new plants miss their scheduled commercial operating dates.
Negative factors: The current 2021 equity yield gap on the SET (versus the Thai 10-year bond) of 3.5% (0.5 standard deviation below the mean since 2010) is considered moderately expensive (versus an expensive gap of 2.9%). Higher bond yields, possibly triggered by a less dovish US Fed, may cause a (brief) market pullback in the fourth quarter.