After underperforming regional bourses, the Thai stock market is expected to recover on the back of economic stimulus as the country awaits the formation of the new government, while global sentiment will be bolstered by Chinese stimulus and a more dovish approach by the US Federal Reserve.
Positive factors: Whenever the Fed sends out dovish signals, returns on most assets drift higher. On the other hand, hawkish signals about monetary policy and interest rates usually drive returns lower.
The Fed is now signalling no rate moves this year, after three increases last year and earlier expectations of two this year. As well, it is hinting at more liquidity injections, providing a lift for global assets.
Further increases in Thai shares, we believe, will be driven by commodities and global economic plays as the US dollar softens in response to the Fed's changed tone. This will likely affect commodity prices and stocks directly linked to commodities.
Earnings plays on the SET in the first quarter were concentrated in a few medium-sized sectors, including Food, Property, Finance and Media. But aggregate growth appears frail, declining more than 10% year-on-year in both core earnings and net profit. Positive signs from US-China trade talks and expectations of additional government stimulus may provide short-term boosts to the overall market or to a few sectors.
We estimate that the SET bottom line in the first quarter declined 16% year-on-year but was up 67% from the fourth quarter of 2018. This reflected weaker core operations and slimmer non-operational gains (inventory and asset divestment) than in the first quarter of last year.
As for core earnings, we estimate a decrease of 11% year-on-year but a gain of 5% on the quarter. Top performers in year-on-year core growth are Food (improved pork prices and higher restaurant sales), Finance (healthy loan growth), Residential Property (higher unit transfers ahead of tougher mortgage curbs), Media (low-base-effect rebound) and Contractors (notably on higher revenue booked by STEC from projects in hand).
Weaker Q2 earnings on higher expenses: Our preliminary outlook for the second quarter is for a decline of 12% year-on-year in SET core earnings and 14% in net profit. Negative factors will include higher employee benefit expenses as a result of changes to the Labour Protection Law that took effect in early April, with severance payments rising to 400 days from 300 days for the longest-tenured workers.
The sectors positioned for the best year-on-year core and net earnings expansion are Finance (strong loan growth, contained loan-loss provisions), Industrial Estates (higher land transfers) and Tourism, especially the higher contribution from recently acquired NH Hotels to Minor International (MINT).
Pace of lower earnings forecasts slows: Revised earnings forecasts have moderated, in aggregate, in April, as Brent oil prices topped $70 a barrel and amid stronger earnings prospects for specific companies.
Generally weaker macro developments, global and Thailand-specific, and extra employee benefit expenses (around 2% of estimated aggregate net profit for the year) booked to comply with the revised labour law could exert more downside pressure on our earnings estimates. Our current full-year earnings-per-share (EPS) assumption is 110, slightly above the consensus of 109.4.
Meanwhile, MSCI has concluded its Foreign Inclusion Factor consultation for Thailand, and proposals to be implemented during the May semiannual review should be positive for all Thai stocks.
Negative factors: Lack of clarity about the new government may continue for a while. Official results from the March 24 parliamentary elections are due for release on May 9. Whether investors feel confident about the stability and functionality of the next administration obviously remains to be seen.
Finally, keep an eye on plans to auction 700MHz spectrum after talks between the NBTC, digital TV operators and the ICT Ministry. The minimum bidding price is expected to be no less than 25 billion baht for each of the three licences for 15MHz of spectrum.
Now that the three telecom operators have been given some relief in the form of extended payment terms for their 900MHz licences, the minimum bidding price is justified. If the benefit from that relief is included, a bidding price that will result in zero net present value is estimated at 25.3 billion baht.
