SCB Securities Co., Ltd. (SCBS) says the recovery and resumption of economic activities following an abrupt standstill caused by the Coronavirus 2019 (COVID-19) pandemic will be key to maintaining the Stock Exchange of Thailand (SET)’s composite index rally in the 2nd quarter of 2020.
SCBS Managing Director in charge of the Research Group Mr. Sukit Udomsirikul said the Thai stock market has already bottomed out, with the index plummeting to 1024.46 points on March 23, 2020. The index rebounded strongly by 13% in April, and 24% from the lowest level in March when it plunged by 33% from the highest point of the year in mid-January. It is a recovery at a quicker rate than the average whenever the stock market has experienced crisis. The rapid recovery was attributed to a continued decline in overall global risk caused by the COVID-19 pandemic as the number of patients has increased at a slower pace while the number of those recovering from the deadly illness has edged up in many countries, including Thailand.
Simultaneously, Mr. Sukit said, financial and liquidity risks have eased as a result of the rush by central banks and governments around the world, particularly the United States, to inject liquidity in financial markets and business sectors, bailing out ailing economies, and relieving people’s hardship with unprecedented amounts of money, sometimes more than 10% of gross domestic products. Thailand, like other countries, has come up with three sets of economic remedy measures, boosting investor confidence and spurring increased investment in all asset classes.
Although the spread of COVID-19 is unlikely to end soon and contains unexpected risks that are likely to affect investment sentiment, such as the crude market plunge, Mr. Sukit believes the possibility of the stock market plunging again like in March has eased given the readiness of measures issued to cope with the crisis. Because of this, he was confident the worst has been already over.
However, the Thai stock market may have turned around too quickly and strongly. Investors will likely be upset if the expected resumption of economic activities is postponed due to a second wave of the COVID-19 pandemic.
“So, in our view, it is too early to forecast that the SET will recover and move up to pre-COVID-19 pandemic levels in the 2nd and 3rd quarters of 2020, as it is expected profits earned by listed companies in 2021 will be lower than those in 2019. Also, a return by many industries to growth at pre-COVID-19 levels is considered challenging because interest rates in Thailand remain low and the country’s economic growth is still slow. Given the fact that the current price-earning (P/E) ratio of the market is 16.8 times or +1SD of the 7-year P/E average, it already reflects 2020 operating performance. We therefore estimate returns on the Thai stock market in the 2nd quarter of 2020 will be limited. But for long-term investment, we forecast the SET index will hover around 1,400-1,450 points in 2021,” said Mr. Sukit.
As for the current investment strategy, he suggested investors opt for defensive and high-quality stocks. Given uncertainties in long-term growth and short-term recovery, investment in defensive stocks with strong fundamentals is recommended.
So, top picks are those recommended at the beginning of the 2nd quarter of 2020, including BDMS, BEM, BTS, CPF, and MINT. Although stock prices have already recovered, they are likely to move up further because operating performance is expected to return to normal in the near future. However, SCBS suggests investors be cautious about investment in energy and bank stocks because future profits are very uncertain.
Mr. Sukit forecast the operating performance of listed companies will turn around in a U-shape form, while the stock market is likely to recover in a V-shape form. Investors should opt to invest in sectors with profits set to enjoy a V-shape recovery when many countries, including Thailand, are due to resume economic activities as usual.
At least, he believed the overall economy will gradually recover if economic activities resume in May 2020 as forecast. Still, GDP usually takes 5-7 quarters to return to normal growth, while a full recovery of EBITDA will take more than three quarters.
Mr. Sukit said the stock market is apparently recovering in a V-shaped form rather than a U-shaped one. But the current recovery remains very uncertain, which will put pressure on the overall Thai stock market in upside terms. With the current level of stock prices, SCBS suggests investors weigh on stocks with a V-shape recovery potential, such as stocks in the land and rail transport sectors, production sector, and shopping complex business. Still, they should be cautious in investing in businesses expected to recover in a U-shape form, which includes airlines, airports, hotels, and tourism, because the travel business requires high confidence. In addition, the psychological impact experienced by consumers remains a pressing factor on some industry groups, including property development and automobiles in the medium term as they require huge investments at a time when purchasing power is declining.
He added one of the key risk factors most investors are monitoring closely is the downward revision of the forecast for economic growth and net profits of listed companies in 2020. Previously, most analysts had revised the estimate downward to a certain extent because they were waiting to see new data and how the COVID-19 pandemic situation developed. However, the latest projections are that COVID-19 will affect the economy most adversely in the 2nd and 3rd quarters of 2020, with the impact gradually easing in the 4th quarter.
“In our view, we forecast SET earnings per share (SET EPS) in 2020 will drop by 22% year-on-year due mainly to the shrinking of total sales by 16%. The SET EPS remains 17% lower than consensus, meaning that the forecast may be further cut. Since early 2020, the SET EPS forecast in 2020/2021 has been revised downward by 26% and 18% respectively, the lowest when compared with 13% and 8% in regional markets. SCBS projects that SET EPS in 2021 will grow 25% given the low base in 2020, which corresponds to the EPS of the regional markets expected to grow 30% on average. But until 2022, net SET profits are not expected to recover and grow to 2019 levels. It reflects a slow recovery for some businesses, such as banks, food, property, and tourism. The recovery of energy and petrochemical businesses depends on the crude price direction.”
Another key risk factor involves disappointment if economic activities resume later than expected.
“Although we believe the resumption of economic activities is positive for the stock market, the current market recovery has already absorbed the impact of the COVID-19 pandemic in 2020 to a certain extent. So, we forecast the market may experience some disappointment in the future unless economic activities resume as quickly as expected. Worse still, the market has not yet absorbed possible impacts in case there is a second wave of the COVID-19 spread. But unless Thailand and key economies including the United States, China, and Europe experience a second wave of the pandemic following the resumption of economic activities, our projection is that the SET index has already bottomed out and is gaining momentum. So, the expected short-term target of the SET index declining to 950 points is no longer applicable,” he said.