The SET index retreated in the past week, with key supports at 1,510 and 1,520, due mainly to political uncertainty, while first-quarter earnings also triggered sell-on-facts activity.
The combined net profit of SET-listed companies edged down 2% year-on-year, but was up 62% quarter-on-quarter on the back of extra items in the fourth quarter of 2022. Excluding extra items, core earnings in the first quarter would have fallen 4% year-on-year and 4% quarter-on-quarter, in line with our forecasts but off the market consensus by 4 percentage points.
The year-on-year earnings drop reflected inventory losses and weaker refining margins of refiners; higher cost pressures from labour, power and rental expenses; slowing global demand for some export-focused sectors, as well as softer Covid-related revenues of healthcare operators.
However, some sectors continued to register solid growth year-on-year such as contractors (higher equity income and a low base in the first quarter of 2022), tourism (healthy tourist arrival growth), banking (wider net interest margins), property (solid housing demand), and retailers (demand recovery).
Among companies covered by Bualuang Securities, 34% registered better-than-expected earnings while 37% were in line and 29% fell short of expectations. Those delivering worse-than-expected results were companies with a large earnings base weighed down by dim global economic prospects such as petrochemicals (narrower spreads) and food (smaller margins on higher feed costs). Therefore, we and the market have trimmed our 2023 SET earnings forecasts by 5-6%.
In the coming week we expect the SET to continue moving sideways down as earnings downgrades have pulled expected earnings per share (EPS) lower to 98 baht (from 104 baht), and closer to the Bloomberg consensus at 97 baht. The new EPS estimate, combined with a stable price/earnings ratio at 16.6 times, implies a 6% drop in the year-end SET target from 1,728 points to 1,631.
Considering the SET Index in the week prior to the downgrade, we anticipate potential maximum downside risk at 1,470 to 1,500, depending on market sentiment and other factors. Applying technical tools together with the aforementioned fundamental factors, we foresee potential downside towards 1,500 to 1,520. If the lower support range fails to hold, the SET could then head down to 1,470.
Investors should be extremely cautious. We recommend holding fast and not rushing to buy against the market downtrend in the past week. Some stocks may be worth accumulating during the week, though not at full steam. We recommend waiting for political clarity and signals from listed companies as they begin to hold meetings with analysts to discuss their results and outlook.
WATCH FOR POLICIES
Once the political direction and the shape of the new government, as well as its key policies, become clearer, overall market sentiment should improve. This should allow the SET to stage a rebound to a certain extent after a steep setback. If the formation of the government can be finalised as soon as this week, it would be a positive surprise.
Key information from analysts' meetings by listed companies could also affect investment sentiment. Companies with an explicitly positive outlook or dirt-cheap valuations could stage relatively stronger rebounds.
In the longer run, clearer economic recovery prospects will bolster earnings forecasts.
Key economic data due next week include US core personal consumption expenditure (the Federal Reserve's preferred gauge of inflation), and updated purchasing managers' index data, as well as UK inflation.
Among negative factors, any unexpected political development that adds to uncertainty could weigh on the benchmark index.
Potential policies of the new coalition government that may drag on earnings of listed firms -- such as higher wages or new taxation plans -- could also add pressure on sentiment.
External factors to continue monitoring include the US debt ceiling talks. Although most observers expect the issue to be resolved before the June 1 deadline, any issues that arise along the way could still upset market sentiment.