Stocks in flux on US yield boost
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Stocks in flux on US yield boost

Equity investment around the world, especially in Asian bourses, has become less attractive

Employees head for work at the Stock Exchange of Thailand (SET), as the foreign money flight has caused a downgrade in the local bourse's earnings per share. (Bangkok Post file photo)
Employees head for work at the Stock Exchange of Thailand (SET), as the foreign money flight has caused a downgrade in the local bourse's earnings per share. (Bangkok Post file photo)

With the 10-year US bond yield rising to almost 3%, fuelled by market expectations of higher US interest rates on the back of rising inflationary pressure and higher oil prices, investment appetite in many stock markets across the globe has been sapped by amplifying fears of lower returns.

The yield on the US 10-year treasury note rose to 2.96% on April 20, the highest since Jan 10, 2014.

The 10-year treasury note's yield is especially important, playing a key role in setting rates for a whole range of business and consumer loans, including home mortgages.

Burgeoning inflation expectations led to a rise in interest rates earlier this year, sparking a widespread equity sell-off as stock traders grew nervous over whether the US economy was ready for increased borrowing costs.

Rising interest rates can also be bad for stocks because, at some point, higher-yielding bonds can be more compelling and safer investments.

Most Southeast Asian markets fell on Friday ahead of US payrolls data, with Indonesia hitting a nine-month closing low on worries of an economic slowdown, even as foreign investors continued to cut down their equity holdings.

Foreigners remained net sellers in Asian stock markets last month, including in Taiwan, South Korea, Indonesia, the Philippines and Thailand, according to Asia Plus Securities.

Combined outflows in these five bourses stood at US$5.7 billion (181 billion baht) in April, while year-to-date (as of May 1) outflows were logged at $13.7 billion.

Resilience in the US economy could prompt the US Federal Reserve to increase the pace of its rate hikes, potentially drawing capital away from regional markets. The Fed's inflation target is set at 2%.

On the other hand, investors are also keeping a close watch on US-China trade talks, the outcome of which could be euphoric or catastrophic.

"The US economy seems to be on a path of recovery, so it is expected that the US dollar will appreciate in the second half, while the baht will slightly depreciate as a result," said Tada Phutthitada, president of the Thai Bond Market Association (ThaiBMA).


Thai government bond yields have, for the first time ever, stayed below the returns of US government bonds for longer than six months.

According to the ThaiBMA, this is a result of a persistent current account surplus and prolonged low inflation rates.

The yields on two-year and 10-year Thai government bonds have been lower than those of corresponding US treasuries since October, Mr Tada said.

The interest rate environment and inflationary pressure, both of which have remained low for extended periods, together with an increase in the trade surplus, are contributing factors to the low bond yields, along with ample savings and liquidity in the domestic financial market, he said.

Despite how returns generated from Thai bonds are lower than those in the US and other developed markets, foreigners are still investing in the domestic bond market, expecting the baht's value to remain strong and the currency to appreciate further down the road on the back of Thailand's strong fiscal position, Mr Tada said.

With this outlook, foreign investors will receive investment returns from foreign exchange and coupon rate gains.

Net foreign inflows into Thai bonds stood at 38.66 billion baht in the first quarter as foreign investors continued to be net buyers from the end of last year to the tune of 222.99 billion baht. The outstanding value of foreign holdings was 871.66 billion baht, or 7-8% of total outstanding value in Thai bonds, with most foreigners investing in government bonds.

Tada: US economy on a recovery path

Mr Tada said Thai government bond yields are expected to remain unchanged for a while, as the domestic policy interest rate is projected to remain low on Thailand's tepid economic growth recovery and low domestic inflationary pressure.

Inflation in Thailand could rise if agricultural prices start to climb, he said.


Investment in the Thai bourse is expected to become less attractive this month after the earnings gap between domestic stock investment and the 10-year US bond yield dropped to the lowest level since 2007, according to Trinity Securities.

The drop comes from the US 10-year bond yield's recent climb to near 3%, said Trinity Securities research manager Nattachat Mekmasin.

The earnings gap between the Thai stock market and the US 10-year bond yield averaged 5.1% from 2006 to 2018 but has dwindled to 3.1%, making investment in the Stock Exchange of Thailand (SET) less appealing, Mr Nattachat said.

The earnings gap is calculated from the bourse's expected earnings per share (EPS) in 2019, divided by the SET index, he said.

The SET's expected dividend yield for next year is forecast at 3.1%, making the spread between domestic stock investment and the US bond yield nearly zero compared with the average gap in the past of around 0.8%, Mr Nattachat said.

Additionally, the fundamentals of SET-listed companies don't align with the bourse's investment outlook going forward, prompting analysts to continue revising down their SET index targets and EPS for 2018 and 2019, which automatically pressures Thai stocks to become more expensive, he said.

"The downgrade in the SET's EPS in April comes from analysts downgrading returns among major listed companies," Mr Nattachat said.

Other factors inducing lower investment appetite in the bourse include rising crude oil prices and the US dollar's appreciation, both of which could add pressure to commodity prices, he said.

Komsorn Prakobpol, head of the strategy unit at Tisco Financial Group, said the returns on US 10-year treasury bonds hit 3% for the first time since January 2014, following easing concerns of a global trade war and rising inflationary pressure from increasing oil prices.

Such developments have induced a stock market correction worldwide, Mr Komsorn said.

Stock investments continue to have a downside outlook, but stock markets could rebound next month because the US 10-year treasury yield is not expected to rise further this year, he said.

"We view that the 10-year treasury yield will not be much higher than 3%, as the rate remains higher than the policy interest rate, implying that the market has absorbed the US interest rate hike," Mr Komsorn said.


With inflationary pressure in the US fanning expectations of further interest rate hikes, investors should keep in mind another important issue -- how the US central bank will eventually unwind the massive balance sheet generated from previous quantitative easing programmes.

"Unwinding the balance sheet is a crucial factor affecting long-term US Treasury yields," said Amonthep Chawla, head of research at CIMB Thai Bank.

Apart from the massive balance sheet and a rising interest rate, higher US Treasury yields are anticipated with the Trump administration expected to embark on hefty fiscal spending, for which the government has to raise funds from bond issuance, Mr Amonthep said.

This scenario would increase the supply of US government bonds.

But other central banks, such as the European Central Bank, the Bank of Japan and the Bank of England, are not expected to follow the Fed's interest rate normalisation, as economic conditions in these countries still warrant the use of aggressive monetary stimulus policy, Mr Amonthep said.

The Fed is projected to raise interest rates twice more this year, depending on inflation results, with high oil prices and reasonable US economic growth in the first quarter forming the basis for further rate hikes, said ASP executive vice-president Poranee Thongyen.

Poranee Thongyen, executive vice-president of Asia Plus Securities (no photo byline)

Such rate hikes would propel the greenback's appreciation and the baht's subsequent fall, a boon for Thai exports in the second quarter, Mrs Poranee said.

But the baht's depreciation could be short-lived, Mr Amonthep said, as the trend of a stronger dollar is expected to be fleeting because of the large US trade deficit, making the US government prefer a weaker dollar.

Emerging-market economies still have considerable economic growth potential, which would prompt funds to return to these countries, he said.

"There could be some stock speculation going on in emerging stock markets, but a hard-landing stock market correction is not anticipated because fund flows are not expected to shift entirely into bonds," Mr Amonthep said.

Amonthep: US bond supply may rise

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