The SET is undergoing a correction again after leaping in the past three weeks, hitting a record high at 1,678 points on Sept 18. The year-to-date return of the Thai stock market is 8%, lower than the 20% seen in the Philippines, 17.5% in India and 11% in Indonesia, but close to the 7.9% delivered by China and 7% by Malaysia.
The price/earnings ratio of the Thai market is 16.4 times, close to regional peers but still lower than in India and the Philippines. This means Thailand is no longer as cheap as it was a few months ago.
After the correction is finished, however, the SET Index should continue rallying on the back of the improving local economy. Export growth in August was 13.2% year-on-year, the highest in four years and seven months. Average export growth from January to August 2017 was 8.9%, compared with a 1.1% contraction in the same period last year.
Private investment is also showing a solid rebound, with the value of projects seeking Board of Investment privileges at 300 billion baht in the second quarter, up from only 60 billion in the first quarter. Forty-six percent of the application value since the end of 2016 represents investments in the 10 industries targeted by the government, Eastern Economic Corridor (EEC) ventures and government infrastructure. Accordingly, Thai GDP growth could touch 3.5% this year and 4% next year.
While Asian economies including Thailand are expected to pick up in 2018, China will likely see deceleration as a result of earlier massive investments. It is also noteworthy that Standard & Poor's recently lowered the sovereign credit rating of China to A+ from AA-.
Meanwhile, developed countries are expected to show a slower rebound or stay flat in 2018 after having risen significantly in 2017. Given such changes in economic conditions, funds will move to the stock markets of countries with recovering economies, especially laggards with low P/E ratios like Thailand.
Asia Plus estimates 2018 Thai stock market earnings at 1.07 trillion baht or 110.40 baht a share, up from 990 billion or 101.36 baht a share in 2017, which is equivalent to earnings growth of 9% year-on-year in 2018. Therefore, the 2018 P/E ratio will be 15 times, lower than regional peers except China. However, given the rising risk in China, Thailand is relatively safer. We believe the SET Index will touch 1,766 points next year.
Foreign buying on the SET in September was thin at only 7.26 billion baht, but that contracted with net selling in the previous three months. Accordingly, the year-to-date position of foreign funds is now a net buy of 9.96 billion. Foreign holdings, both direct investments and via non-voting depository receipts (NVDR), were only 31% of the market total, the lowest in 13 years.
For this week, SET Index is likely to undergo a correction, with 1,670 to 1,678 points as a major resistance range and 1,640 to 1,650 as a major supporting range. Most local factors are positive.
Thailand's leading economic indicators continue to show positive signs. The Consumer Confidence Index (CCI) is expected to show an increase for the second month in September after rebounding for the first time in four months in August. That would follow a reported increase in cement sales and construction material prices last week and a rebound in the Thai Industries Sentiment Index (TISI) after a five-month decline in August. All these factors should strengthen Thailand's economic recovery for the rest of this year.
The baht has weakened again after strengthening 8% since the start of the year against the US dollar. Markets have a positive outlook about US tax reform which would boost profits and purchasing power. A weak baht would benefit exporters, especially in the third quarter which is a high season.
Asia Plus estimates third-quarter earnings of the 10 commercial banks under coverage at a total of 49 billion baht, or growth of 8.1% on the quarter (but a decrease of 5.5% year-on-year). Bad-debt provisions, which were very high in the second quarter as a result of the default of EARTH, are expected to decrease in the third quarter, while fee income and net interest income are projected to increase gradually. KTB, BBL, BAY and KKP should see remarkably strong earnings.
International markets are keeping an eye on US nonfarm payrolls in September, which are expected to decrease from August as a result of the recent hurricanes. The unemployment rate is projected to stay at 4.4%. These factors would slow down US dollar appreciation and weaken the baht.
In the next one to three months, Asia Plus still recommends investing 60% of the portfolio in stocks, focusing on the following plays:
Third-quarter growth stocks, especially export plays that benefit from a weak baht (HANA, GFPT, VNG and MCS) and domestic plays (THANI, LPH and BCH).
Banking plays: SCB, TCAP and KKP.
Porranee Thongyen is senior executive vice-president in the Research Department at Asia Plus Securities Co Ltd.
