We believe domestic politics will dominate the SET index direction in July as the new government takes shape, with the first vote to select the prime minister just days away.
On the external front, US Federal Reserve policymakers are set to meet later this month, and China is widely expected to announce new economic stimulus measures.
We expect foreign funds to flow into the Thai bourse if the formation of the government and selection of the prime minister proceed without incident.
Earnings speculation is likely to kick in as well, with banks due to announce second-quarter results next week. The earnings reporting season is due to end on Aug 15.
Concerns about more US interest-rate increases, meanwhile, have put downward pressure on global equities.
Fed chairman Jerome Powell has said two more rate hikes, at least, will probably be necessary to tame inflation this year. The next Federal Open Market Committee meeting is on July 25-26.
Volatile oil prices also bear watching. The global economy remains fragile, and hence oil demand is likely to be sluggish. This could keep global crude oil prices below $75 per barrel, potentially taking a toll on earnings of big energy companies.
And while the Chinese economy remains sluggish, the government has yet to announce any significant new stimulus measures. This has affected Thai equities, particularly those of businesses that are tied to the Chinese economy.
The major trend is tilted to the downside. If the major support of 1,500 remains intact, the index will trade in the "blue" channel -- a trading range we've seen over the past couple of years -- and advance to break above the supports at 1,535 and 1,560.
However, a break below the support of 1,500 will open the downside. Given that the moving average convergence/divergence has been below the zero line, the index may find support at 1,450 and 1,400.
INVESTMENT STRATEGY
With the new government coming up, stocks linked to public investment and those that stand to benefit from the new government's policies look attractive. Also, stocks that have retreated sharply due to political factors are expected to rebound.
Moreover, we expect foreign funds to increasingly flow into the Thai bourse once domestic politics stabilise. Our stock picks for July include:
- BBL (Buy, target 195 baht): Our target for the bank is pegged to a 2023 price to book value (PBV) of 0.7 times, or 0.75 standard deviation (SD) below the 10-year average. The share price has high potential to outperform the SET Index, having traded close to 200 baht when net profit came in close to 10 billion baht per quarter.
- BEM (Buy, target 10.80 baht): Our target price for the expressway and transit operator is based on a sum-of-the-parts valuation approach. The share price has retreated 15% so far this year, which is well below the level seen before the announcement that the company had won the Orange Line project. While the downside risk looks limited, we believe earnings momentum will build up and there is an upside from the Orange Line.
- CPAXT (Buy, target 45 baht): Our target for the operator of Makro stores is pegged to a 2023 price/earnings (PE) ratio of 41 times (0.5 SD above the five-year average). The share price has underperformed the SET index by 10% in the past month and 6% in the past three months in response to political uncertainty, which we expect to dissipate in the third quarter.
- MENA (Buy, target 2.50 baht): Our target for the transport operator is based on discounted cash flow (weighted average cost of capital of 7.7% and a terminal growth rate of 2.0%). The target price is equivalent to a forward PE ratio of 27 times based on a compound annual growth rate of 30% for net profit in 2022-24. A key catalyst is broader economic growth.
- OR (Buy, target 25 baht): Our target for the retail arm of PTT Plc is pegged to a 2023 PE ratio of 25.4 times (1.25 SD below the five-year average). We forecast second-quarter net profit to improve further quarter-on-quarter, tracking the marketing margin uptrend. The lifestyles business stands to benefit from seasonally stronger demand in the summer season.
- ORI (Buy, target 15 baht): Our target for the property developer is pegged to a 2023 core PE ratio of 9.5 times (0.25 SD above the five-year average). The shares currently trade at an undemanding 2023 core PE ratio of 6.4 times, which implies 0.5 SD below the five-year average.
- PLUS (Buy, target 10 baht): Our target for the beverage maker is pegged to a 2023 PE ratio of 27 times. We foresee robust earnings growth in the second and third quarters on the back of the business high season. The stock's valuation is cheaper than its peers' average PE of 26.4 times.
- WHA (Buy, target 5 baht): Our target for the industrial estate developer is pegged to a 2023 PBV of 2.2 times (1 SD above the five-year average). A key catalyst is higher presales, which could hit a record high of about 2,000 rai in 2023. The company has abundant land plots to accommodate large business demand.