REOPENING LIFTS SPIRITS BUT WATCH INFLATION TREND

In the past week, the Thai stock market moved sideways up in a range between 1,630 and 1,650 points. Sentiment was bolstered by the prime minister’s announcement that the country will reopen to foreign tourists from selected countries on Nov 1, providing time for operators to prepare.

We expect the SET Index to continue trading sideways in the 1,640 to 1,660 range in the coming week. Outstanding stocks will be domestic plays as reopening and lockdown easing will boost purchasing power and lend support to retailers, restaurants and mass transit operators.

Among other positive factors, after six years of low inflation (less than 1.1% yearon-year), the domestic inflation trend looks set to rise toward 2% in the coming months, driven by higher commodity prices (led by crude oil) and the end of government subsidies for utility bills. Overall pricing power will probably be limited this year due to weak demand, which will squeeze some companies’ profit margins.

But we expect pricing power to rise next year, enabled by a strong demand recovery. Other than the oil and gas sector, which will be the beneficiary of rising oil prices, healthcare, property, industrial estate and mall plays should do well in an inflationary environment, supported by stronger demand.

That said, inflation bears close monitoring. Higher commodity prices are pushing up inflation — especially for fossil fuels and some metal products, which have shot up during the last 12 months. Heavier demand reflects disrupted supply chains, due in part to China’s power crisis.

These commodities could see more price upside in the short term, until China resolves its electricity generation issues. Softer agricultural product prices may mitigate inflationary pressure, but lower farm gate prices could also squeeze farm incomes.

For businesses, pricing power could be limited in the short term but will improve with demand. Producers and distributors of commodities are on the short list of direct beneficiaries of rising commodity prices. Downstream industries are likely to generally have only limited pricing power in the early stage of the post-Covid recovery.

But a stronger demand recovery would open more upside for sectors that have shown relatively good pricing ability in the past, such as industrial estates, healthcare, residential property, malls and Mice-oriented businesses. Firms with moderate pricing power could raise prices to partly or fully offset the effect of rising costs. Sectors with weak pricing power, due to regulation or intense competition, are exposed to a risk of seeing their margins squeezed.

Some sectors typically show performance that is closely correlated with changes in the Consumer Price Index (CPI). Healthcare (better price adjustment capability), Information and Communication Technology, and Insurance (a beneficiary of rising bond yields) stand out for their close correlations with a rising CPI.

Keep in mind that the focus is on the short-term correlation, as a longer period of observation could be affected by other substantial factors, such as GDP or sector-specific issues.

Negative factors for the equity market in the near term include higher bond yields, which would increase corporate funding costs. Higher inflation, the macroeconomic recovery, and less dovish rhetoric among major central banks, especially the US Federal Reserve, have driven bond yields higher, even though the Bank of Thailand’s policy interest rate is likely to remain low for a couple more years.