We expect the SET Index to continue to be volatile given the higher global recession risk, as many central banks are expected to keep raising interest rates to fight inflation. Adding to the negative factors, the US dollar continues to strengthen against other currencies and the prolonged Russia-Ukraine war has taken a toll on energy markets.
As well, the Chinese Communist Party Congress in mid-October might influence the market's direction. While the main focus will be on the expected approval of another term for leader Xi Jinping, many investors believe authorities might also announce an easing of the zero-Covid policies that have had a severe impact on the world's second-largest economy.
On the domestic front, while the Constitutional Court has ruled in favour of Prime Minister Prayut Chan-o-cha's term continuing, we believe many investors are already looking ahead to a general election that must be held by the first half of next year. Historically, election-related spending in the six-month period prior to national polls has been positive for Thai equities. Among other factors to watch:
Selective plays: Although global equities have been under pressure from hawkish US Federal Reserve policy and the energy crunch, we believe stocks with strong growth stories will continue to drive the market.
US dollar strength: The US dollar has strengthened in anticipation of more Fed interest-rate increases, resulting in other currencies weakening. The baht last month sank past 38 to the dollar, which appears to have pressured the market in the near term, but it has since recovered to around 37.20.
Fed + recession risk + European energy crunch: Fed officials continue to signal that more large interest-rate increases are needed to tame US inflation. Investors will be highly vigilant until the next Fed meeting in early November. Higher rates, coupled with recession risk and an energy crunch in Europe as winter nears, will likely continue to pressure markets in the near to medium term.
OCTOBER OUTLOOK
The SET Index is expected to move towards the lower end of the sideways channel if it fails to hold above the psychological support of 1,600 points. Current support levels are seen at 1,550 and 1,510, and resistance at 1,630 and 1,650 points.
Where investment strategy is concerned, we recommend avoiding stocks that will be negatively affected by rate hikes. Our stock picks are as follows:
- BEM (Buy, target 10.20 baht): Our target price for the expressway and transit operator is based on a sum-of-the-parts valuation with the following key catalysts: a potential contract signing for the Orange Line extension, which would add 2-3 baht to our target price; a substantial improvement in the tourism sector; and the double-deck project and operations and management contract for the southern route of the Purple Line, which might see a concrete development in 2023.
- BH (Buy, target 245 baht): Our target price for the hospital operator is pegged to a forecast 2023 price/earnings (PE) ratio of 45 times. The stock currently trades at 41.2 times 2023 PE, which is -0.25 standard deviation (SD) below its five-year average. Net profit is projected to surge 220% on an annualised basis this year and 11% next year, with earnings per share (EPS) rising at a compound annual growth rate (CAGR) of 88.5% from 2021-23.
- EPG (Buy, target 12 baht): The polymer producer's second-quarter 2023 core profit is forecast to grow rapidly, with a brighter outlook in the second half of 2023. We forecast full-year 2023 core profit to grow +3% to 1.5 billion baht. While first-quarter 2023 core profit represents 16% of our full-year forecast, we predict core profit will grow significantly to 350-400 million baht in the second quarter and expand further in the second half on robust growth from both Aeroflex and Aeroklas. More importantly, a weaker baht and falling oil prices might provide an upside to earnings forecasts. Our target price is pegged to a 2023 core PE of 21.7 times (close to the five-year average). The stock currently trades at 18.0 times 2023 core PE, which implies -0.5 SD.
- GFPT (Buy, target 19 baht): Our target price is pegged to a 2022 PE of 14 times (close to the five-year average). A new slaughtering plant is set to come onstream in mid-2023, which will increase production capacity by twofold, while we believe broiler chicken prices will likely remain elevated.
- KBANK (Buy, target 190 baht): We expect the bank's third-quarter 2022 net profit will grow 30% year-on-year and 4% quarter-on-quarter to 11 billion baht in light of lower loan-loss provisioning and stronger loan growth. For the full year, we forecast net profit to increase 11% to 42 billion baht. We predict that non-performing loans (NPLs) will increase to just 4.2% of total credit in 2022, a slower pace compared to its peers, helped by the asset management joint venture with JMT, which was established in June this year. Our target price is pegged to a 2022 price to book value (PBV) of 0.9 times (-1.0 SD below its 10-year average). The stock's valuation remains attractive, trading at 0.7 times PBV, which is -1.5 SD compared to its major rival SCB at 0.8 times.
