UPTURN COULD FOLLOW SLUGGISH OCTOBER

We started October 2019 on the wrong foot with the SET index falling four days in a row for a total decline of almost 2%, from 1,637.22 points to 1,605.96 on Oct 4. The decline came alongside relatively light trading value of 39.7 billion baht per day on average, well below the year-to-date average of 52.9 billion baht.

The drop in the index was the result of a pullback in several big sectors during the period and big-caps hitting several-year lows. The energy sector slumped 2%, banks saw an overall drop of 3.5%, and the property sector plunged almost 4%. The ICT sector was relatively flat.

Hence, a number of stocks are now trading at three-year lows, with some even at five-year lows. Looking ahead, we believe that the market will move sideways for the rest of the month before gaining ground over the last two months of the year.

The big story since the end of September has been the “Taste Shop Spend” stimulus campaign, under which the government is giving 1,000 baht to 10 million people nationwide to spend at selected stores. To obtain the funds and pay for goods and services, registrants must utilise the government’s mobile app. Feedback has been good, and the 10-billion-baht spending target is expected to be hit this month. The programme also offers 15% cash back, up to 4,500 baht at a time and capped at 30,000 baht in total, until the end of November.

According to the Finance Ministry, over 1.1 billion baht was spent in the first week and over 50% of that went to Otop and traditional stores. Although the campaign should provide a slight boost for the economy, the impact will be only short-term. We note that commerce stocks did not respond positively, reflecting tepid market sentiment overall. Indeed, we believe that investors are now more concerned about the weakening of the long-term economic outlook.

NO LOCAL RATE MOVE

Looking at interest rates, while the market is expecting the US Federal Reserve to cut its policy rate in the fourth quarter, it does not expect the Bank of Thailand to make a move until 2020. Investor confidence has waned since the beginning of the year, in light of slowing GDP growth and poor export figures. This can be seen in the flows; foreign investors are now net sellers of about 6 billion baht for the year to date, a stark change from being net buyers of 60 billion baht in the first half of 2019.

We see minimal downside risk at current market levels, noting that it has already declined for the last three months. Though the trade war and external risks remain, we believe that the market has already factored these in.

Furthermore, we expect global liquidity to increase; the Fed has already stopped tightening its balance sheet, while the European Central Bank has announced quantitative easing amounting to €20 billion a month starting in November. This influx of liquidity should encourage foreign investors to return to the market.

There is also the LTF factor. In the fourth quarter of 2017 and 2018, net inflows to the Thai stock market from retirement mutual funds (RMFs) and long-term equity funds (LTFs) were 52.7 billion and 53.3 billion baht, respectively. But since this is the last year to invest in LTFs, market flows should be larger than usual and could help push the SET index back to the 1,700 level as we close out the year.

__ With the Fed no longer tightening its balance sheet and the ECB embarking on QE, the influx of liquidity should encourage foreign investors to return to the SET.

TOP Q4 PICKS

With most major sectors still unattractive, we recommend a selective investment theme, with BJC, ERW, TRUE and WHA as our top picks for now. In the commerce sector, BJC should benefit from the Taste-Shop-Spend campaign through Big C hypermarkets, as well as from additional government stimulus now being discussed. Moreover, the company is expanding its smaller-shop portfolio, with plans to open another 100 Mini Big Cs, giving it 300 nationwide.

Meanwhile, we recommend ERW as a play for the fourth-quarter tourism high season. The hotelier is promoting its lowcost brand, Hop Inn, and will open a further 14 such hotels, for a total of 50, within 2020. This will be key in helping ERW gain provincial market share. Moreover, its flagship hotel, the JW Marriott, finished renovations in the third quarter of 2019, opening the door for room rate increases of 10-15%. These factors should help ERW improve its earnings.

In the telecom sector, TRUE shares have plunged 26% since July, from 6.80 baht to 5.05 baht in September. Investors are concerned about lower earnings in the second half and lawsuits against TOT and CAT over ADSL, access charges and interconnection.

We believe the court is unlikely to reach a ruling any time soon, and since TRUE won the previous round, the plaintiffs (TOT and CAT) have forfeited the right to file an appeal. With an unfavourable court ruling in the next 12 months unlikely, we consider TRUE’s price decline in recent months to be unreasonable and foresee a short-term recovery.

For WHA, performance should peak in the fourth quarter as the company anticipates transferring more than 1,000 rai. Moreover, WHA is expecting to transfer 4.9 billion baht worth of warehouses and factories into WHART in December, further improving overall performance.