Cautious optimism built on the SET
Thai stocks have traded in a range of 1,610 to 1,640 points in recent days. The SET surged earlier in the week to 1640 before a correction kicked in after a more hawkish tone from the US Federal Reserve triggered a massive sell off in global risk assets.
We expect the SET to move sideways and consolidate around 1,580-1,600. More hawkish signals from the Fed will put pressure on regional stocks, but there is no need to panic. We are reiterating a selective buying strategy, focusing on reopening parts that tend to outperform the market.
Positive factors: Prime Minister Prayut Chan-o-cha announced a concrete plan to reopen the country in mid-October and assured that all of the 105.5 million doses of coronavirus vaccine purchased by the country will be delivered to accommodate of the reopening plan.
SET could see a further rise, fueled by value and lagging stocks that have already factored in the impact of the third Covid outbreak. The broad market’s price-to-earnings (PE) ratio will remain high above its normal trading range as bond yields remain low (so far).
SET target 1605: Our benchmark end-of-year target of 1,605 for SET is linked to a 10% discount (cost of equity) compared to our end-of-year 2022 target of 1,784, which implies a profit per share. 98 baht share (EPS) and a PE ratio of 18.2 times, or 1 standard deviation (SD) above the 10-year average.
Our EPS forecast of 83 baht for 2021 is roughly in line with the local analyst consensus of 81.15, while our 2022 forecast of 98 baht is slightly above the consensus number of 95.30.
Our baseline scenario assumes a steady macroeconomic recovery as vaccines become more widely available from the third quarter, no intensification of global conflict (trade or geopolitics) under a Biden administration, and no substantial divergence in oil prices from our basic assumption. of about US $ 68 per barrel for Brent crude.
Our bullish scenario places the end-of-year 2021 target at 1,694, or 5% below the 2022 target of 1,784. This reflects greater market optimism about the outlook for 2022, when inbound tourism is expected more or less go back to normal.
Effective government economic measures and budget disbursements, a full recovery of Covid (domestic and foreign), no further economic shocks, and only a moderate uptrend in bond yields (no signal from the Fed on the cut or a rate of decline). ‘higher policy interest) are the key factors that would be necessary for our bullish scenario to unfold.
Negative factors: The outcome of this week’s Fed meeting was more hawkish than the market anticipated. The Fed’s own dot plot survey now suggests two interest rate hikes by 2023. (In March, the Fed signaled that there would be no movement until 2024.)
The economic projections of the US central bank also anticipate higher inflation than expected. Fed Chairman Jerome Powell did not send any signals about cutting bond purchases, but acknowledged officials were ready to start talking about it. More clarity is expected at the next meeting at the end of July.
The change in the Fed’s results triggered a consolidation in US stocks. However, investors have apparently realized that the tightening of monetary policy going forward aligns with the strong US economic recovery. Therefore, the recent consolidation of stocks and other assets (such as oil and gold) has not caused panic.
Attention to the gap: Stock spread valuations for 2021 remain moderately expensive. Upward revisions to earnings forecasts for Thai stocks over the past few months have pushed the stock yield spread into a moderately expensive space (0.82 SD below average for the SET versus the US). Thai 10-year bond, versus an expensive space of 1.4 SD below par), although the SET has hit new highs since the start of the year.
Investor optimism about the post-Covid macroeconomic recovery and the possibility of improving second-half earnings forecasts could keep SET in the air until the third quarter until bond yields rise further.
A 30 and 50 basis point increase, respectively, in bond yields would imply an expensive SET at 1,676 and 1,614 points, respectively, based on the current earnings per share forecast for 2021.