MODEST UPWARD TREND DETECTED

MARKET RECAP: Thai shares moved sideways up this week in response to earnings of listed companies that mostly beat market expectations. Positive domestic catalysts, such as the introduction of the Thailand Future Fund, outweighed negative external factors such as US-China trade tensions.

Washington has now threatened to increase tariffs to 25%, from 10% planned earlier, on US$200 billion worth of Chinese goods later this month. Beijing has countered with a pledge to impose a 25% penalty on $16 billion worth of US goods including autos, steel and petroleum products from Aug 23. Meanwhile, the Federal Reserve has reiterated its intention to raise US interest rates further in September. MARKET OUTLOOK: We expect the SET to continue moving sideways up in the 1,710 to 1,750 range. Among the negative factors: We see only limited upside as the benchmark index approaches our 2018 target at 1,760. Following the release of second-quarter results, we find only a handful of earnings upgrades despite better-than-expected performances. Therefore, we foresee a slim chance for the SET to overshoot our 1,760 target for the year.

Morgan Stanley Capital International (MSCI) on Monday will announce the list of stocks to be added and removed from the calculation of its indices, while this will be the last reweighting of Chinese A Shares. We believe selling pressure from active funds will fade as most have adjusted their portfolios since the May revision. Thus, we expect a mild adjustment from a limited number of passive funds and the impact is unlikely to be as severe as in the previous revision.

POSITIVE FACTORS: The SET will likely outperform bourses in Asia excluding Japan because:

Asean economies are depending more on domestic consumption these days and tend to experience fewer adverse effects from trade tensions than overall Asia ex-Japan economies.

Foreign investors have rather low exposure to Asean equities as the majority of trading volume derives from domestic investors and local institutions.

Monetary tightening signals from the Indonesian and Philippine central banks will likely curb Asean currency weakness versus Asia ex-Japan units, which have been the targets of intervention by central banks to offset disadvantages from trade barriers imposed by global economic superpowers.

Asean stocks have been de-rated, with current price/earnings ratios being brought down close to the levels seen in 2010 when economies were just recovering from the global crisis. As well, previous earnings downgrades trimmed expectations for second-quarter performance and, thus, resulted in positive surprises.

As of Aug 9, 45 listed companies (almost half ) covered by Bualuang Securities had released their earnings. Of the total, 47% beat expectations while 27% fell short. In the first quarter, 41% beat expectations and 28% missed expectations while 38% exceeded expectations in 40% fell short in the fourth quarter of 2017.

The US has announced a fresh round of sanctions on Iran. Morgan Stanley expects Iranian crude production to tumble more than 1 million barrels per day (bpd) to 2.7 million bpd by the fourth quarter as a result. The decline in supply will offset slower demand amid slowing global growth and keep crude prices high, thus bolstering energy shares.

Keep an eye on any indications of an election date announcement, which would probably lift overall sentiment for the Thai stock market.