Thai shares swung sharply in the past week within a range of 1,590 and 1,620 points, tracking a similar pattern in global equities. Volatility was fuelled by macroeconomic factors following the recent US Federal Reserve meeting and diverse interpretations of future Fed policy by market participants. Meanwhile, other global risk assets such as bitcoin and gold also nosedived.
In the short run, we expect the supports at 1,530 and 1,550 to limit near-term downside for Thai shares. If the SET Index drops to those levels without material fundamental change, it could be the end of the down cycle for this year.
We expect the market to move sideways in June and possibly rebound to test the initial resistance level at 1,650 to 1,660, and then at 1,680 to 1,700. We base this on the belief that negative news flows have largely been factored in, and investors have already trimmed their portfolios and squared most derivative positions since the SET started descending steadily from over 1,700 mark earlier.
Among the positive factors, aggregate first-quarter net profit after tax of the stocks comprising the SET rose by 14% year-on-year and 10% quarter-on-quarter. Operating (core) earnings for the first quarter of companies covered by Bualuang Securities jumped by 39% year-on-year and 21% quarter-on-quarter; aggregate core profit was 10% above our expectations.
Profit forecast upgrades have increased materially since March in anticipation of a continuing economic recovery following the easing of Covid-related restrictions.
In the meantime, the expected market correction will open buying opportunities. The global recovery from Covid-19 is asynchronous -- Thailand's economy will continue building momentum through 2022, while US growth has peaked. The Fed's hard monetary policy -- in terms of both higher interest rates and a massive reduction in its bond holdings -- will dampen GDP expansion. Meanwhile, China's zero-Covid policy is hitting its economy so hard that it doesn't yet appear to have found bottom.
SECOND-HALF REVIVAL
Despite the global headwinds, relatively robust Thai GDP growth should limit the downside risk to Thai equity prices. Assuming that the Russia-Ukraine war begins to ease, we expect Thailand to show a healthy economic recovery through the second half, led by rising tourism numbers.
The recovery path is bumpy, but Thai economic growth will accelerate in the second half, underpinned by a recovery in tourism. Thailand is still a regional laggard, with real GDP expected to return to pre-pandemic levels only towards the end of this year.
Among reopening plays, we prefer stocks in the following sectors: Consumer (recovering demand), Industrial Estates (rising land bookings and sales), and Transport (traffic recoveries). Among tourism recovery plays, given easing concerns over Covid and the further relaxation of entry restrictions for arrivals, we expect shares in the Tourism and Healthcare (a recovery in fly-in patients) sectors to benefit substantially.
Among the negative factors or risks, investors need to stay alert in the medium turn and monitor any developments concerning the Russia-Ukraine conflict.
We also expect soft earnings for the second quarter. Rising raw material costs will squeeze the margins of firms with only a limited ability to pass through higher costs to customers, while higher energy prices will reduce effective consumer purchasing power.
Looking at the local banking sector, despite decent loan loss-provisioning in the first quarter, we see only limited room for further improvement, considering the macroeconomic backdrop.
As well, huge inventory gains tied to the first-quarter oil price spike will be absent from the second-quarter numbers of the oil & gas and chemical companies that account for a hefty chunk of SET capitalisation.
EYE ON THE FED
The Fed continues to bear watching after its decision on May 4 to raise its benchmark Federal Funds Rate by 50 basis points to a range of 0.75% to 1%. At the same meeting, it laid out its plan for balance-sheet reduction, saying it would not roll over $47.5 billion a month in maturing bonds from June to August, after which it will discontinue rolling over $95 billion a month in maturing bonds.
US stock markets rose on the news, but the rally was short-lived, as headwinds remain considerable. We expect two further 50-basis-point increases from the Fed and another 25-basis-point increase by year-end.
The Thai 10-year government bond yield is now 2.9%, prompting us to cut our year-end SET Index target from 1,793 to 1,705, implying a price/earnings (PE) ratio of 17.4 times (almost 0.5 standard deviation above the SET's long-term mean) and earnings per share of 98 baht.