The Thai stock market fell the past week as investor confidence was undermined by lingering political uncertainty, with two key court cases now poised to drag on into July or beyond.
Sell-offs in several stocks also led to forced sales and panic selling as investors sought to cut losses, even though fundamentals remained unchanged, in contrast with flooring share prices.
Investors have been debating whether the root cause of the market setback is the authorities' tolerance of short selling or overall economic and political conditions -- or both.
Stock sentiment this week should improve from the previous month, and the SET index could rebound within a range of 1,300 to 1,340 points, or turn sideways up.
For a start, pressure from some domestic factors could ease. The Constitutional Court has given the all-clear to the Senate elections, while former premier Thaksin Shinawatra has been granted bail in his lese-majeste case, which will take months or even years to move through the legal system.
That leaves two key cases unresolved: The charter court will hold its next hearing in the Move Forward Party dissolution case on July 3, and Prime Minister Srettha Thavisin's ethics case on July 10.
Another supporting factor is regulators' attempt to restore market confidence by introducing new trading regulations. Notably, an uptick rule to take effect on July 1 should curb abnormal short selling.
With restored confidence, cash-rich investors will have more courage to buy stocks, while those with open short positions may have to cover them to mitigate impact from speculators that ride on market momentum.
This is the picture we should see in the coming week. If not, it would mean that confidence is still short of expectations.
Meanwhile, overall factors should continue to support global risk assets in the early part of the third quarter. These include a steady slowdown in inflation, which could pave the way for the US Federal Reserve to start cutting interest rates by September. We still anticipate three cuts this year, moving the key rate down from 5.5% to 4.75%.
THAI OUTLOOK
Thailand's economy should be boosted by accelerating public and private investment. Disbursement of the state investment budget finally resumed in May, and drawdowns in the first week of June accounted for 80% of the entire total for May, indicating strong momentum.
Board of Investment applications and factory construction approvals were solid in the first quarter of 2024 and should continue to improve.
Key investment themes and stocks with good potential in the third quarter include:
- Economic stimulus and interest rate cuts, helping contractors (STEC) and financial services firms (MTC).
- Solid earnings and dividends, such as ITC, TU and ADVANC.
- Tourism and transport businesses entering the high season (ERW and AOT).
- Industrial relocation from China (WHA and WHAUP).
- Transition to La Niña weather pattern, benefiting hydropower plants (CKP) and agribusiness (TVO).
Among negative factors, we could start to detect initial recession warning signals, and this time it could be a case of "bad news is bad news", rather than "bad news is good news" as seen previously. Specifically, we are seeing a US consumption slowdown and a weakening job market.
A widely used pre-crisis warning sign is drawing very close to the trigger point. The so-called Sahm rule, named for economist Claudia Sahm, has shown that when the three-month average of the unemployment rate is half a percentage point higher than its 12-month low, the economy is in recession. Once this condition is met, there is a high possibility that a recession will occur in the following 12 months.
In the short run, the market is still pressured by factors including political uncertainty; an earnings yield gap (versus US bond yields) that remains on the pricey side, prompting foreign players to sell; continuous earnings forecast downgrades; and the risk of a faster than expected global growth slowdown.
