The Thai stock outlook for 2021 was dulled by another wave of COVID-19, increasing market risk.
With the SET Index projected at 1,550 points based on fundamentals, SCBS recommends defensive stocks with stable earnings and showing clear signs of business recovery.
Amid the new wave of COVID-19 outbreaks taking place in April, SCB Securities Co., Ltd. (SCBS) predicts that the overall Thai stock market outlook for the second and third quarters of 2021 will not be as bright as the previous quarter, when the SET Index rebounded sharply as high as +9.5% over pre-COVID-19 crisis levels. Based on current fundamentals, the overall SET Index for 2021 could reach 1,550 points. For 2Q/3Q21, SCBS recommends investors buy during the downward market drift and put more weight on defensive stocks with stable earnings and clear signs of recovery expected in the next 12 months (taking the continuing impacts of COVID-19 into consideration), including small stocks with high growth potential. Recommended stocks include BDMS, MINT, BEM, TWPC, and DOD.
Speaking about the 2021 stock outlook, SCBS Managing Director and Head of Research Sukit Udomsirikul revealed that this year’s overall investment outlook is different from the previous year as SCBS sees lower economic risks. However, the market seems to pose higher market risks. It is estimated that the risk of economic slowdown in 2021 will not be as high as 2020, although the COVID-19 pandemic continues to persist. The global economy is in a state of recovery, with lockdown measures helping to curb the spread of COVID-19. The increasing vaccination rate has sparked new hope for increasing economic activities as countries could soon reopen. SCBS had previously projected that the Thai economy would be likely to achieve growth of 3% in 2021. However, the re-emergence of COVID-19 has dampened that prediction. In any case, SCBS still believes that domestic consumption and exports in 2021 could still grow well due to government stimulus measures and global economic recovery, while recovery of the tourism sector could be slower than expected.
The reasons SCBS sees higher market risk include: 1) the higher liquidity level from implementation of an easing monetary policy resulted in asset prices rising very quickly over the past year, despite the COVID-19 crisis; and 2) investor expectations for stimulus and vaccine policies are high, reflecting current stock market valuation. If the economy improves, dependence on economic stimulus measures, both monetary and fiscal, would be less. While the market expects inflation and bond yields to start rising from 2Q21 onward, all of the aforementioned factors are likely to magnify financial market volatility. Additionally, an issue needing close monitoring is how quickly the COVID-19 situation can be contained after vaccination progresses, as this will directly affect the opening of the country. SCBS expects to see examples from some countries soon, such as the US and the UK.
The last two COVID-19 outbreaks largely affected industries relying primarily on domestic demand, including restaurants, land transport (electric trains), tourism, and retail businesses. Other industries affected to a lesser extent include the healthcare, housing, and finance. Impacts were triggered by 1) behavioural adjustments such as less activity and staying home more often, and 2) the government's fiscal tightening measures. The latest set of measures, implemented during December 2020 to March 2021 and in April 2021, affected industries and businesses less than those implemented in the first round between March and April 2020, while the impacts of the latest outbreak are likely to be more severe than those in the December 2020 – March 2021 round.
Based on these expected circumstances, SCBS has re-assessed the performance of various industrial/business groups in 1Q&2Q21. The tourism industry in 1H21 will remain in the red zone. The land transport (electric train) sector will experience sluggish passenger numbers in 1Q21 continuing to 2Q21, compared to 4Q20, but will be better than 2Q20. The restaurant business between 1Q21 and 2Q21 will remain almost the same, but can generate some profits from adjustments and cost control. Retail business in 1Q&2Q21 will remain at a similar level, with revenues shrinking less than in 1H20. The healthcare sector will be less affected, primarily those areas involving local patients, with recovery starting to be seen in 1Q21. Other sectors will generally be less affected. Investors are advised to closely follow industry operating results.
The Thai stock market is in a transitional phase from a “hopeful” period, as reflected by increasing prices from expanding valuations, to a “Growth” phase. In this latter period, returns from the Thai stock market will go in line with earnings. This phenomenon indicates that from now on, the Thai stock market will show a greater correlation between profits and the fundamentals of individual companies. Based on the latest estimation, the EPS of listed companies will grow 46% and 21% in 2021 and 2022, respectively.
The trend of the Thai stock market could be more volatile after the SET Index recovers close to its pre-COVID-19 level at around 1550 points, a valuation based on fundamental factors. While economic recovery and performance have not been smooth due to the continuing COVID-19 outbreak, investment in 2Q and 3Q21 should focus on safe defensive stocks with stable growth. This includes investment in smaller stocks demonstrating better growth potential than larger stocks. It is expected that the outbreak situation will improve in 4Q21 after vaccination gets underway. Investors should gradually adjust their portfolios to focus more on stocks that will fare better due to their competitiveness after the pandemic, including those that will benefit from the opening of the country if prices are not too high.
In 2Q21 the equity market is entering a low season, with SCBS expecting a sell-off in May. This investment strategy has been evaluated from historical stock market statistics revealing better stock returns between November to April, which tend to prompt divestment of equity holdings in May. However, the market contraction will allow investors to buy on dip and take advantage of better returns when the economy resumes growth. Recommended stocks for 2Q21 are BDMS, MINT, BEM, TWPC, and DOD.
• BDMS: Profits are expected to recover at 17% year-on-year, with 2Q21 being the first quarter to record year-on-year earnings growth from a low base. In the short term, the share price is expected to benefit from a new outbreak of COVID-19 and the likelihood that the government will soon allow private hospitals to import vaccines. Shares in the Hospital Group are classified as a Laggard Play.
• BEM: In the short-term (April 2021), despite the third wave of the COVID-19 outbreak prompting fewer MRT passengers and expressway users, the impact has not been as severe as the first wave, without lockdown measures. Year-on-year performance has reached bottom and will be on the road to recovery from fewer COVID-19 impacts.
• MINT: In the short-term, MINT has been affected by the re-emergence of COVID-19 and a sluggish economy in Europe due to the lockdown. However, in the medium-term businesses in Europe and Thailand will slowly recover after more people have access to vaccines, driving 2021 performance to fare better with fewer losses and increasing profits in 2022.
• TWPC: In 2021, TWPC is expected to return to profit from rebounding tapioca demand, especially in the Chinese and Taiwanese markets. In addition, the selling price is still on its highest trend for the past two years and three months, which is a good sign for significantly improving margins.
• DOD: Having benefitted from the increasing popularity of hemp, the company has laid out explicit business plans from upstream to downstream (except for planting). It has has entered into MOUs with JKN, CHAYO, KISS, and BEAUTY to conduct R&D for producing nutritional supplements and skincare products with hemp ingredients, which are expected to launch by 4Q21.