SET reviving after Wall Street scare

SET reviving after Wall Street scare

Earnings optimism will bring investors back, but proposed mortgage curbs could hurt property shares. By Tisco Securities

The Thai stock market -- along with other emerging markets -- took a big hit last week after the US 10-year Treasury yield surged to 3.25% from 3.05% a week earlier as investors rushed to sell government bonds in anticipation of an interest-rate increase. This led to the Dow Jones Industrial Average falling more than 1,300 points (5%) on Wednesday and Thursday with the tech sector seeing most of the decline.

The sudden weakening of the baht also precipitated a sharp selloff of Thai equities. As a result, the SET Index was down by 77 points (4.5%) on Thursday from its peak of 1,760 at the start of October. A modest rally on Friday lifted the index by 13.27 points to finish the week at 1,696.16.

Although investors are likely to remain nervous about the state of global markets for some time, we think the SET is starting to look more attractive after the recent selloff. Some key points to consider:

1. The Treasury yield scare may be abating: With recent US inflation numbers looking fairly benign (up just 0.1% in September after rising 0.2% in August), we should start to see some stabilisation in global equity and bond markets as Treasury yield gains are pared back. Combined with a resurgence in baht strength (to 32.60 to the dollar on Thursday after dipping to 33 earlier), this reduces the probability that we will see a repeat of the massive foreign fund outflows we saw last Thursday.

2. Continued baht resilience should ease foreign selling: We believe the prospect of a Bank of Thailand rate increase in 2019, coupled with Thailand's strong current account relative to its peers, means the baht should remain resilient. Currency strength mitigates the effect of foreign selling, which played an important role in the recent index decline (foreign net sales reached 10.6 billion baht on Thursday). If foreign net selling falls to 400 million or 500 million baht per day, we expect local funds should be able to drive the SET Index back up.

3. EPS growth should fuel a year-end rally: SET earnings are 45% driven by energy/utilities and petrochemical shares. If crude oil prices and the foreign-exchange rate remain accommodative, this should result in a stable or higher earnings per share (EPS) contribution from these sectors. Among domestic-facing sectors, we expect steady improvement in year-on-year growth from banks, commerce and telecom shares -- particularly as government stimulus measures start to take effect.

4. The biggest risks are manageable, for now: A trade war is still a concern, though the risks now appear to be priced into export-led stocks. Tourism prospects look weaker after disappointing Golden Week arrival numbers from China, but are unlikely to dent our overall EPS outlook (109 baht a share for 2018, up 9.4% from 2017).

At the individual sector levels, we continue to see headwinds for the property sector and, to a lesser extent, banks. This reflects the Bank of Thailand's proposal to require 20% down payments for all second homes and homes costing 10 million baht or more. The central bank is now seeking public comments but wants the loan-to-value (LTV) limit of 80% to take effect in January.

The central bank says the new rule is intended to discourage banks from providing loans based on very low or no down payments and to weed out "search-for-yield" property buyers in favour of those with real housing demand. It hopes this will help stabilise property prices.

However, we think the change is unlikely to materially ease speculative demand as investors and speculative buyers purchasing multiple units are more likely to make their purchases with cash deposits.

The property developers we cover have 20% of their total inventory priced above 10 million baht, with LH the most exposed at 48%. However, the listed developers we cover claim to already require at least 15% down on low-rise and high-rise units, especially those priced above 10 million baht.

If the LTV restriction does go ahead, we expect a rush in transfers in the final quarter, followed by weaker transfers and presales in 2019 because of the higher base. Therefore, we continue to favour low rise-focused developers, namely LH and QH, as they have more inventory ready for transfer in the fourth quarter.

On the banking side, we foresee minimal impact on loan growth as second and third mortgages and homes priced above 10 million baht account for only a small proportion of the total loan mix.

Even in the worst case, where we assume banks will not choose to offset the impact by offering other forms of credit such as corporate loans, and all potential home loan borrowers decide to forgo purchases, we estimate around an 11% decline in bank mortgage growth.

However, we expect the impact should be higher in banks with higher exposure to mortgage loans such as SCB (27%) and TMB (21%), where loan growth could fall by 300 and 230 basis points respectively.

The central bank decision is not final, and banks and developers have proposed a softer approach at a recent public hearing. However, with or without the new rules, we don't see a good reason to be in the property sector given our expectation of declining demand from both domestic and overseas buyers. The latter are pulling back as a result of the strong baht relative to peer currencies (particularly the yuan). Note that Chinese buyers now account for 20-40% of condo purchases in Thailand.

In any case, we continue to prefer banks (BBL, KBANK and TMB), commerce (CPALL, BJC and ROBINS), contractors (CK, STEC) and building materials (SCC) based on our pre-election stimulus spending theme.

Do you like the content of this article?
COMMENT