Post-poll hangover possible on SET

Expect stimulus binge next year, but 2020 uncertain. By Tisco Securities

We expect the Stock Exchange of Thailand to rise gradually through 2019 as oil prices eventually recover and consumption picks up. We expect the election to be delayed to late April or early May 2019, but we think this has been mostly priced into the SET. The perception of political continuity combined with improving private consumption should be positive for sentiment.

After 2019, however, we expect headwinds to mount as the baht continues to weaken and liquidity dries up. Our 2018 year-end target for the SET Index is 1,770, with a target of 1,860 next year and 1,820 in 2020.

Decent third-quarter 2018 earnings and expectations of an oil price rebound keep us optimistic about the year-end outlook: Despite falling oil prices, deteriorating GDP numbers and renewed foreign fund outflows amid global macro uncertainty, third-quarter earnings of Thai listed firms have been better than expected.

The direction of oil prices is worrisome, but we expect Brent to rebound in December after Opec’s decision on production cuts. Consequently, we remain confident that the SET index will rebound.

However, there is some possibility that crude may not fully recover to the mid$70 level, which could lead to inventory losses and lower average selling prices for energy firms in the fourth quarter. If crude remains below $70 a barrel in December, it could pare 2-3 baht from our current SET earnings-per-share forecast of 108.7 baht for 2018.

The election and stimulus will be the key index drivers for the first half of next year, followed by a fairly stable second half. We expect a peaceful election (in which the current government returns as part of an anti-Pheu Thai coalition) and transition to civilian government to provide further relief for the market.

More importantly, we believe government stimulus (we expect 315 billion baht in upcountry spending alone) will be needed to offset declining exports, tourism arrivals and farm income. These aid schemes will help push the SET index towards its 2019 peak.

NO MORE ‘STREET POLITICS’

Note that we still expect the election to be delayed until late April to early May 2019, though we think the market has already factored the delay in. We also see very little chance that the type of “street politics” that caused sporadic chaos between 2006 and 2014 will return regardless of who wins the election. For a start, the country is looking forward to the coronation of His Majesty the King, which the prime minister has said would happen after election.

As well, the new electoral system sets the stage for more short-lived coalition governments, rather than administrations dominated by a single party that resists calls to step aside, as in the recent past.

But things start to look shaky from there: We are less optimistic about 2020 as we expect the main opposition party will look for ways to destabilise the coalition partners. We foresee frequent cabinet reshuffles and possibly even a House dissolution and new election.

The resulting political uncertainty will come at a time when the country is entering a new investment cycle, with exports and tourism volatile. This could lead to a lower current account and further baht weakness.

As well, liquidity will keep falling with foreign fund outflows from the Thai equity market continuing until the Fed rate-increase cycle ends in 2020-21. As well, there could be a bumpy transition to the new tax-incentive savings scheme proposed to replace long-term investment funds (LTF).

P/E CONTRACTION

All of these factors make a P/E contraction likely after the election. Excluding the energy and petrochemical sectors, Thai listed companies have seen unprecedented P/E expansion since 2011, moving from 12.9 times to 19.6 times in 2017, although non-energy/petrochemical earnings per share (EPS) recorded a compound annual growth rate of just 7.6%. This is due in part to excess local and foreign liquidity.

Once most of the good news has been priced in and liquidity dries up in 2020, we expect the contraction to accelerate, with the forward PE falling from 15 times to 13.5 by 2020.

However, once the P/E contraction is over, we expect the index to start rising in line with EPS growth. Subsequently, we have lowered our 2019 year-end SET target from 1,990 to 1,860 (representing a 14.6x forward P/E), to reflect the more subdued valuation outlook. The 2020-21 SET target is 1,820 to 1,920.

For the near term, we maintain our positive view on banks (BBL, KBANK, TMB) and consumption-related plays (CPALL, BJC, ROBINS) as we expect the government to prop up the economy going into the election year. Telecoms (TRUE, INTUCH, DTAC) should re-rate once earnings recover, as the worst has already passed for the industry in the third quarter of 2018.

However, as liquidity dries up in 2020, high-P/E stocks should become increasingly vulnerable. Banks, contractors and building materials and high-yield names remain safe as they are trading at lower multiples.

We continue to have a long-term bearish view on property stocks given our expectation of limited foreign buying of condominium units in 2019, though transfers could accelerate in the first quarter of 2019 following the imposition of new mortgage lending curbs by the Bank of Thailand.

We believe government stimulus will be needed to offset declining exports, tourism arrivals and farm income. These aid schemes will help push the SET index towards its 2019 peak.