As we pointed out in our previous article on Sept 5, we are probably at a late stage of the current economic cycle, but nowhere near the end of it. Gross domestic product growth, both global and domestic, has been creeping up at slightly above the long-term average trend, with no sign of overheating.
There is no risk of runaway inflation, and therefore no pressure for any central bank to rush into raising interest rates. The US Federal Reserve continues to reassure markets that it will continue to raise rates only gradually.
The European Central Bank, the only other major central bank signalling a tightening stance, is still 12 months away from its first rate hike in a decade, analysts believe. The Japanese and Chinese central banks, meanwhile, remain dovish and continue to keep monetary policy accommodative.
Amid the backdrop of strong economic figures and our belief that this late cycle will last for quite some time, SCB Securities has just published its quarterly investment strategy report. In it, we maintain our year-end SET index target at 1,900 points and introduce a target of 2,000 for next year.
The key driver of the upturn in local equities will be earnings growth of around 8-10% per year over the next few years, assuming nominal GDP growth of around 5-6% -- based on real GDP growth of 4-5% plus an inflation rate of 1-2%.
We expect to see a strong market rebound in the fourth quarter of this year, after a near-zero return for the year to date, compared with first-half earnings per share (EPS) growth of 8% year-on-year, and we expect to see stronger year-on-year growth in the second half.
Our fourth-quarter investment ideas are based on the belief that Thailand is firmly on track to enjoy the beginning of an improved investment cycle. Foreign direct investment (FDI) reached a 12-month total of US$11.4 billion in June 2018, the highest since 2014.
We anticipate more FDI into activities related to the government's flagship Eastern Economic Corridor (EEC), supported by special privileges, and a windfall from reallocation of some investments from China as a result of its trade dispute with the United States.
Data from the Bank of Thailand shows that the improvement in FDI inflows has been broad-based with signs of a pickup from Japan, the EU, China (plus Hong Kong) and the US. This has led to a net increase in FDI to manufacturing, especially in automotive and electronics manufacturing.
A recent survey by the American Chamber of Commerce in China and Shanghai (conducted between Aug 29 and Sept 5) showed that 35% of respondents had moved or were considering moving their production facilities to countries outside China, Bloomberg reported. The top destinations include Southeast Asia, India and the US.
Domestically, seasonally adjusted capacity utilisation at a four-year high near 70% will lead to more private investment, while infrastructure projects will drive public investment spending up.
Private investment also has a very strong correlation with domestic private consumption which has been accelerating (slowly but steadily) over the past three years, driven mainly by spending on durable and semi-durable goods.
While the recent improvement in farm income has yet to bear fruit in terms of grassroots consumption, rising wage growth and declining unemployment have fed into consumption by middle- and upper-income earners.
Our "Banking on Investments" theme is based on an expectation that the investment cycle will lead to increasing demand for land in industrial estates. More investment funding needs will strengthen loan demand and the anticipated return of policy rate increases will raise lending rates, directly benefiting commercial banks. Hence, our top picks for the fourth quarter are as follows:
AMATA: With a strong demand outlook and its already large land bank in the EEC, the company plans to acquire more land, which will raise its net asset value by 13%.
ROJNA: The biggest laggard among the industrial estate stocks, the company is building exposure in the EEC by acquiring more land. We expect a compound annual growth rate (CAGR) of 26% in core earnings in the next three years.
WHA: Its industrial property and logistics business will benefit from greater EEC activity. We foresee its land sales doubling, with a CAGR of 16% in earnings over the next three years.
BBL: Loan growth will benefit from the return of private investment. BBL has the best chance for re-rating to the historical mean based on its return-on-equity rebound.
KTB: KTB is expected to experience the largest fall in provisions. Loan growth will speed up. The current valuation is attractive at 0.87 times price to book value.
TMB: TMB has underperformed the SET banking index by 20% this year. However, we expect its fee income to continue to outperform peers with the net interest margin recovering.
Pornthep Jubandhu is senior vice-president of the Investment Strategy Department with SCB Securities Co Ltd.