The SET has turned sideways up, trading in the range of 1,620 to 1,640 points following a strong rebound in the initial week of December from a three-month low of 1,563 that reflected initial jitters about the Omicron coronavirus variant. Short-covering in big-cap stocks in various sectors led gains, followed by mid- and small-caps that have continued to outperform throughout the month.
In the remaining two weeks of this year, the market will likely maintain a sideways pattern in the 1,630 to 1,640 range with lighter turnover as the Christmas and New Year holidays approach.
Key factors to monitor include policy signals from meetings of global central banks. The market generally expects more central banks to adopt a similar policy stance to the US Federal Reserve, which has sent tightening signals to prepare investors for interest rate increases next year. However, this factor probably will not affect the market much as the moves have been partially priced in.
The SET's forecast 2022 equity yield gap versus the Thai 10-year bond of 4% is considered inexpensive, versus an expensive gap of 2.9%. Assuming only a moderate uptrend in bond yields, we see scope for further upside to the SET. Our best-case SET target of 1,793 points for end-2022 assumes a 10-year bond yield rise of 40 basis points from the current level.
EYES ON OMICRON
News flows concerning Omicron will likely fade given current indications that the symptoms are less severe than for the Delta coronavirus variant, with fewer people expected to require hospital treatment. Reports of progress in vaccine development to tackle the new variant will mitigate worries over the fresh wave of outbreaks.
Assuming no more lockdowns and that new Covid variants prove to be relatively less dangerous, the SET should see more upside, supported by improving macroeconomic conditions. The ongoing business recovery should support the following three themes for the first quarter of 2022: economic activity getting closer to normal, value with earnings quality, and price discount plays.
Sectors that align with these themes are Banks (economic recovery, easing loan-loss provision burdens); Consumer Products (recovering demand);Industrial Estates (recoveries in land bookings and sales); Residential Property (core demand is still fuelling growth for some stocks, and a few pay good dividends); Materials & Packaging (demand recovery, fatter margins); and Transport (traffic recovery).
Moreover, subsiding worries over Omicron will also lend support to shares of tourism, hotel and hospital firms (those treating foreign patients).
Among Commodity plays, we think refineries are more attractive than chemical producers given a solid refining margin outlook in the first half of 2022 amid growing demand and reduced supply pressure. Chemical stocks in general will continue to be pressured by narrowing spreads and climbing supplies of certain products.
Among potential negative factors, we are most concerned about the following risks: a tepid economic recovery that fails to meet market expectations; sub-par Thai government economic policy implementation; falling oil prices; geopolitical/trade conflicts; and a steep rise in bond yields.
A spike in US government bond yields could drive up volatility in global equities including the SET. A steeper surge in bond yields, possibly triggered by a more hawkish Federal Reserve, may cause market dips.
RISK SCENARIOS
Under our bear-case scenario, our 2022 year-end target would be 1,581 points, reflecting a price/earnings (PE) ratio of 17.5 times, or 0.5 standard deviation above the 10-year mean, on earnings per share (EPS) of 93 baht for the overall market. Activity would be squeezed by slow global and domestic macroeconomic recoveries, ineffective government stimulus measures and disbursement, and a steeper rise in bond yields.
Other risks include lower oil prices, renewed (trade and diplomatic) tensions between the US and other countries, and escalating conflict in the Middle East.
Thai politics could provide an additional risk factor. Although the government's term does not end until 2023, some observers believe an election could be called sometime next year. Uncertainty over the result of the vote and government formation could add to market risk.
