WAR IMPACT PRICED IN, LOOK FOR NEAR-TERM REBOUND
Over the past two weeks, the SET has been highly volatile. Jitters over the Russia-Ukraine war have driven up energy price and inflation while dragging down risk assets and global equities. The SET managed to rebound late last week and has been trading sideways around 1,650 points, responding to the severity of the situation, the status of peace negotiations and the responses of major countries and international groups such as NATO.
The Thai stock market has rebounded further in the last few days as war factors have now been largely priced in, while the Federal Reserve did not provide any negative surprises.
The US central bank on Wednesday lifted its benchmark interest rate by 25 basis points as expected, while indicating it planned six more increases this year.
Despite war uncertainties, we expect the stock market to attach less weight to Ukraine-related factors in the near term.
If the magnitude of the conflict does not escalate into world war and signs emerge that it can eventually be resolved, the effect on equities should not be substantial.
We are currently screening stocks to accumulate and sectors that will likely stage a stronger rebound than the market. We are looking at two key criteria:
The stock price has fallen more steeply than the broader SET and has not fully recovered yet;
A company has solid fundamentals, is able to avert high cost impacts from the war, is not directly affected by economic sanctions, and in some cases could even benefit from geopolitical tension. Among the stocks we believe meet these criteria are SABUY, MONO, CIVIL, TRUE, IVL, NCAP, SCB, PTTGC, SA and WHA.
Assuming no drastic escalation in geopolitical risk, we expect that the (near) normalisation of domestic business should keep investors fairly upbeat about further upside for the local equity market for the remainder of the year.
Our year-end 2022 SET target of 1,793 points implies a price/earnings ratio (PE) of 18.3 times (1 standard deviation above the market’s 10-year mean) and earnings per share of 98 baht. We expect a general macroeconomic recovery in the second half of 2022.
More scope for upside could arise if positive economic data flows are reported among developed and emerging markets, lifting the tide of the overall equity market.
According to our survey of company management and analysts about first- and second-quarter performance and the 2022 earnings outlook for 98 companies under our coverage, 40% of management respondents had a more bullish view on first-quarter earnings than before. Forty percent also felt more confident about 2022 performance and 55% are still sticking with their growth views.
Regarding second-quarter earnings, analysts expect 43% of companies to register positive growth both year-on-year and quarter-on-quarter, while they expect 35% of companies to deliver positive growth either year-on-year or quarter-on-quarter.
Among sectors expected to report continuous earnings improvement in the first and second quarters are logistics, major hospitals, IT retailers, media, public transport, technology, and mid-sized credit providers.
Since late last week, crude and other commodity goods have started to retreat. This will be positive for companies for which energy expenses are substantial, such as air transport, power plants and paper-box producers.
Despite high local Covid-19 infections, cases are still at levels that the market has already got used to, and hospitalisations are relatively low. In the next one to three months, we expect more positive factors for reopening plays (such as retailers, department stores and public transport) from easing restrictions as the government seeks to start treating Covid as an endemic disease. Authorities have recently relaxed criteria on dining, drinking and partying.
We expect limited short-term impact from resumption of coronavirus lockdowns in China lockdown because authorities have a lot more experience and flexibility in dealing with outbreaks now, while the market can anticipate how the situation will evolve. In the medium to long run, we are putting more weight on a post-reopening recovery.
Among negative factors, beyond the magnitude of war risk, other risks that investors should monitor are cost-push inflation and potential stagflation. Based on our survey, most companies believe they can pass on higher costs through price adjustments. Certain sectors such as agriculture and food, however, see limitations in terms of adjusting prices, mainly related to lag time.
Another factor to monitor is the Fed’s messaging on the direction of monetary tightening after US inflation hit 7.9% in February. Meanwhile, worsening economic and financial data flows from the US, Europe and Asia could lead to downward revisions in market forecasts.