While the Thai stock market surprisingly outperformed other regional markets in spite of the recent political turmoil, a correction is expected in the third quarter of the year. This presents a good opportunity to buy sound stocks, say Chanpen Sirithanarattanakul and Chirasit Vuttigrai, head and deputy head of research, respectively, at DBS Vickers Securities in Bangkok.
OPTIMISTIC OUTLOOK: Chirasit Vuttigrai and Chanpen Sirithanarattanakul.
Despite the unrest in the capital the Thai bourse has managed to post nearly 13% growth for the year to date while other countries in East Asia, excluding Japan, have seen an average decline of 3%.
“There could be many reasons for this rise. If we look at the fundamental factors the GDP growth was very good in the first quarter, climbing 12%. It might have weakened a little in the second quarter but we expect a growth of 7% for the whole of this year,” Ms Chanpen said.
Another reason could be the reallocation of funds within the region, as investors in mainland China and Hong Kong who were worried about an economic slowdown in China have moved their cash to Thailand, Indonesia, the Philippines and Singapore.
DBS Vickers’ SET index target for this year is now 887 points, but Mr Chirasit also foresees that there will be a market correction in the current quarter, a conclusion borne out by research going back two decades.
“If we track the market back to 1986 and study four rounds of economic cycles we see that after a recession sets in the stock market plunges substantially, with this being followed by a rally,” he explained. “The big rallies were due first to economic recovery and second to corporate earnings rising substantially from a really low base.
Most importantly, he said, the rallies occurred after a lengthy period of very low interest rates.
Looking back to 1990-91 when recession flared as the Gulf War was taking place, the stock market rebounded strongly afterward, said Mr Chirasit. An outflow of funds from the US amid low interest rates this led to the Thai bourse peaking in 1993-94.
“That peak occurred when the first interest rate hike took place.”
Mr Chirasit said that back in 1997 when the Asian financial crisis hit the whole region, sending stock markets plunging, a big rally followed in 1999. This coincided with the first interest rate increase since the crisis started.
Mr Chirasit noted that there was a recession in the US in 2000 due to the dot.com bubble, although Thailand was not affected. When the bubble burst interest rates dipped to very low levels and there was a big outflow of funds. The US stock market peaked once more in 2003-04, which again coincided approximately with the first interest rate hike since that recession started.
“A rally has also taken place within the current US recession, and we expect the point where a correction takes place to be the third quarter because our economists expect the first US interest rate hike to occur next month.”
DBS Vickers also expects the Bank of Thailand to raise its benchmark interest rate three times in the second half of this year, by 25 base points a time. This would lead to the SET price/earnings (PE) ratio contracting 0.3 times at each increase for a total 0.9 times from today’s level of 11 times.
Mr Chirasit explained that this means the SET index would go down by 70 to 80 points in the third quarter, but he stressed that this would be only be a correction because the three interest rate hikes from now to year-end are a normalisation of monetary policy and not a real tightening.
“So,” he repeated, “there should be a correction in the third quarter and this would be a good opportunity to buy sound stocks.”
Ms Chanpen said that although people are still worried about the political situation in Thailand the two months of relative calm have drawn foreign funds back to the Thai stock market.
“Foreigners were net sellers for two whole months in April and May, but in June they turned net buy and right now they are still in a net buy mode.”
Local investors too are mainly investing within the country because although the valuation of Thai stocks has risen it is still low. The PE ratio is 11 times compared to the regional average of 13-14 times.
“Many stocks give high dividend yields,” he said, adding that the average for the market is 4% but several are giving 7-8%.”
Ms Chanpen said that food is among the safe sectors for investors who are still nervous about the political situation. For example, the prices of pork, chicken and eggs have jumped considerably.
“There is also the [Gulf of Mexico] oil spill issue which has pushed up the price of shrimp exports to US,” said Ms Chanpen.’
She also recommended property, which might yield as high as 8-9% a year.
While agreeing that property funds in this country are generally not very liquid, she still thinks it is a good idea to invest in them because if the situation deteriorates investors could live on the yield that is paid regularly rather than putting their money in the bank and getting 1-2% interest per year.
However, she said short-term investors should avoid the hotel sector because although occupancy rates are expected to bounce back in the fourth quarter of this year following on to early next year, this would not be the case if there are more protests.
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