The SET index climbed to the key resistance at 1,570 points early this week before consolidating to build a new base at around 1,550+. Early gains were driven by short-covering in blue chips by investors unwinding positions.
The release on Wednesday of data showing slowing US inflation -- at 4%, down from 4.9% in the previous month and just below market expectations of 4.1% -- ignited rebounds in local stocks that had suffered from steep increases in production costs such as SCGP, CBG and ITC.
On Thursday, the US Federal Reserve decided to keep interest rates unchanged as expected, as it wants to monitor the impact on prices of its rate hikes so far. However, it signalled the likelihood of two more increases before the year is over. On the SET, this triggered profit-taking in rate-sensitive stocks such as the lenders SAWAD, MTC and TIDLOR, as well as buying interest in insurers such as TLI and BLA.
In the coming week, we expect the SET to move sideways within a range of 1,550 to 1,570 points, barring a fresh substantial catalyst in either direction. Key economic indicators to monitor this week are purchasing managers' index (PMI) updates in various major economies. However, local politics will weigh more on the stock market as the Election Commission is expected to endorse poll results within one to two weeks.
The EC's decision could turn out to be positive or negative. Incomplete endorsement and/or a potential change in results could be negative, especially if there are a lot of complaints about candidates. But political clarity on the formation of new government could lift the confidence of investors.
FEW CLEAR THEMES
In terms of investment themes, we do not recommend rushing to fully reload stocks of companies seen as beneficiaries from policies of the new government, given pending uncertainties. If there is one clear theme, however, it is probably counter-inflation plays such as CBG, SCGP, BJC, ITC and AAI as commodity prices probably have peaked.
Once investors have a clear picture of who will be in the next government, they will shift their focus to the policies the coalition aims to pursue. We could see fresh rallies in potential gainers from such policies, such as those linked to a new world order like carbon credits and clean energy.
On the external front, investors should monitor PMI readings in light of slowing inflation and easing supply chain problems, to gauge the health of the manufacturing and services sectors in key economies.
Meanwhile, China has pushed forward with steps to boost its economic recovery via a policy rate cut, while many also expect additional fiscal stimulus. A more robust recovery in China will drive supply chain in other countries including Thailand.
In terms of the negative surprise from the Fed's rate stance in the past week, we believe the market will digest this data and decide that it is premature to conclude that two more hikes are a certainty because:
- The Fed is getting more cautious in raising rates due to concerns over adverse effects on commercial banks and the financial system;
- Statistically, the market usually places excessively high rate expectations towards the end of a tightening cycle and eventually makes downward adjustment and;
- US inflation may fall at a faster-than-expected pace in the latter half of this year. Based on the Phillips Curve, an unemployment rate that drops to a certain point will trigger an even greater effect in pulling down inflation.
When the market comprehends these factors, we could see funds flow back into risk assets.
Among the negative factors, Thai politics remains the key drag on the benchmark index. Lack of clarity or signs of potential unrest could cause investors to trim exposure to Thai shares and hold cash.
Any chance of street protests or prolonged conflicts could lead to substantial downward adjustments in SET index targets and forecasts.
On the global front, heavier fighting as the Ukrainian counter-offensive against Russia gets under way will have investors monitoring events.
Meanwhile, confirmation that El Nino has arrived could ignite worries about farm income and stocks related to the grassroots economy. Much could depend on how the government responds.
