SET PAIN DONE BUT TRADE WAR A WORRY
MARKET RECAP: Thai shares managed to stage a mild rebound over the past week amid volatility on global bourses. Renewed worries over a fresh round of US-China trade tensions weighed on overall sentiment.
The Trump administration upped the stakes in its trade war with Beijing on Tuesday, saying it would slap 10% tariffs on another $200 billion worth of Chinese imports. The list of 6,031 items ranges from consumer goods to agricultural products, with the new penalties expected to take effect in September.
Within hours of the US announcement, China vowed to fight back with “firm and forceful measures” but did not detail what they would be. Beijing described the latest US move as “totally unacceptable” bullying, and urged other countries to join China to protect free trade and multilateralism.
The escalating tension between the two economic giants sent markets lower as global stocks fell, the dollar gained and commodities slid.
OUTLOOK FOR NEXT WEEK: We expect the SET will be directionless and the main index likely to remain rangebound between 1,630 and 1,660 with a mixed bag of both negative and positive factors.
NEGATIVE FACTORS: The extent of Chinese retaliation against US threats to expand tariffs to thousands more Chinese imports could become clearer. Many heavily trade-dependent emerging markets including Thailand worry about suffering collateral damage. A new strategy report from the US investment bank Morgan Stanley describes its overall view on emerging markets as “bearish”. It suggests investors unload high-beta stocks and take overweight positions in defensive plays such as telecoms, property, consumer staples, utilities (power plants, water supply, mass transit and expressways), and healthcare.
Potential exists for a heavy sell-off in certain sub-sectors on the SET. We have observed that there were specific sub-sectors where investors agreed to pay premiums with excessively high P/E ratios during “high times”. Now that conditions are more “down and out”, the whole sub-sector could suffer a steep fall of around 70%. This has been the case with cosmetics plays, which tumbled by almost 70%, though we expect the recent selling spree to subside.
However, any recovery hinges largely on confidence in second- and third-quarter performance, which will take at least 3-4 months to restore. If the profitability of particular stocks in the sub-sector remains intact and no other additional risk looms, such stocks could climb back up, as is the case for AU, M, BDMS and BCH, among others.
POSITIVE FACTORS: We expect a consensus downgrade of Q2 earnings and target prices to be a sign of the market bottoming out. We believe the recent setback in prices of various stocks and sectors already reflect the bearish performance outlook to a certain extent. In our view, earnings of banks and property developers should not be worse than market expectations.
Bualuang Securities expects Q2 earnings of the banking sector to recover slightly, led by KTB, KKP and BBL, with estimated earnings growth of 46%, 22% and 11% year-on-year respectively, on the back of loan expansion and better operating expense control. BBL is expected to report 6% annualised earnings growth and TCAP 1% on improved lending and lower provisioning.
In contrast, we expect earnings growth of SCB, KBANK and TMB to slow to 11%, 3% and 1%, respectively. The aggregate Q2 earnings of banks under our coverage is projected at 46 billion baht, up 3% from a year earlier, while overall loan-loss provision expenses for the sector are expected to drop 13% to 40 billion baht.
The SET index tested a low of 1,580 last month, which we view as the bottom for this round. The SET earnings yield gap at this level stands at 4%, on par with the 10-year average and also a level that has accommodated market risks rather well over the past 10 years. Wikij Tirawannarat is a senior vice-president with Bualuang Securities Plc