GLOBAL AND THAI ECONOMIES FACE RISING RISK

Three recent events have changed the world economic picture and monetary policy outlook. The events are: an increasingly severe geopolitical situation, the global economy improving at a better rate than expected, and a signal from the US Federal Reserve that interest rates will not be cut for a while, and will fall by less than expected.

On the geopolitical front, the Israeli-Hamas war has become more serious. The tit-for-tat attacks by Iran and Israel on each other’s territory — the first of their kind — confirm our view that a “shadow war” is unfolding.

We maintain our view that from now until the US presidential election in November, geopolitical violence could increase and the “proxy war” could widen.

Consequently, we readjusted our outlook for economic growth, oil, inflation and interest rates. We now believe oil will average $90 per barrel this year, up from $80 expected earlier. As a result, inflation is likely to be higher than previously expected.

This will cause the Fed to cut interest rates less often — no more than twice, if that, between now and the end of the year. The European Central Bank will probably cut rates just twice, rather than four times as expected earlier, and the Bank of Japan and Bank of Thailand not at all.

Even though world economic conditions have been looking better lately, we believe the risk of a financial and/or economic crisis is increasing. In the US, for example, debt defaults have increased and credit card defaults are at an all-time high.

Moreover, we are concerned about the risk of more volatile capital flow fluctuations. After all, US inflation is likely to remain higher than in other developed as well as developing countries. With US interest rates staying higher for longer, at a time when rates in some economies are falling, wider divergence will lead to further strengthening of the dollar and weakening of other currencies.

ASIAN CURRENCY RISK

We are already seeing the impact in Asia on the yen, baht, won and Taiwan dollar. Indonesia’s central bank this week raised its key rate to prop up the rupiah, which has weakened more than 6% since the beginning of the year.

Higher risk is evident when we look at four key indicators: oil prices, bond yields, gold prices and the value of the dollar. We rarely see all four of these asset classes rising simultaneously, although the price of gold has eased lately. Our concern is that this condition will lead to other risks.

For example, the price of both the Brent and West Texas Intermediate oil benchmarks have increased by 14-17% since the beginning of the year, which will heighten inflation risk and keep interest rates high.

With US interest rates staying higher for longer, wider divergence with rates elsewhere will lead to a stronger dollar and weakening of other currencies.

Both the US 2- and 10-year bond yields have therefore increased by the same level at 15-17%.

When that happens, the price of gold should fall. But it has remained relatively high compared with historical levels amid geopolitical tension. Like the dollar, both are safe-haven assets.

We believe if there is any change in the situation, the prices of some assets could drop sharply from panic selling.

THAILAND OUTLOOK

Turning to the Thai economy, we adjusted our 2024 economic growth forecast to 2.5%, which is the low end of the estimate we made in March. We offer the following reasons:

■ Rising oil prices will increase the subsidy burden on the Oil Fuel Fund, which is already 100 billion baht in the red. Something has to give, so fuel prices may have to increase.

■ Monetary policy remains tight and is not helping to support the economy at home or abroad.

■ Fiscal budget disbursement will be lower than previously expected because the government will use some of the money for its digital wallet programme. We expect the 500-billion-baht handout to have some upside potential, but it is not our main assumption.

In terms of investment strategy, the Thai stock market is still in a fragile state because of concerns about the tense situation in the Middle East and the new reality of US interest rates. Therefore, we recommend selective buys based on four main themes as follows:

■ Stocks that can reduce volatility and serve as assets to hedge against geopolitical risk. We recommend PTTEP, BCP and TOP, while maintaining a negative view on the oil retail sector and airline groups.

■ For investors who can accept low risk, we recommend stocks with strong fundamentals and earnings performance that does not fluctuate too much with the economy, such as hospitals (BDMS and BCH), land transport (BEM), retail stocks (CPALL and CPAXT), communications (ADVANC), and real estate stocks with good dividends (AP).

■ Stocks expected to post healthy first-quarter earnings growth rates, such as SCGP and HMPRO.

■ For investors who can tolerate higher risk, stocks whose prices have dropped sharply even as fundamentals have not changed, including GPSC, GULF, SPRC, CRC and MTC.