December holds the potential for a rebound in the Stock Exchange of Thailand, as the market expects the US Federal Reserve will slow the pace of its interest-rate increases.
With global crude oil prices falling, the spotlight also falls on the Opec+ meeting tomorrow to see whether the group will cut production further, after reducing output by 2 million barrels per day, or about 2% of global demand, in November.
However, we believe oil prices will rebound once the Covid situation in China improves.
On the domestic front, further improvement in tourism and a strengthening baht will continue to underpin the SET Index. Among the key factors:
High tourist season: The tourism sector stands to benefit from the high tourist season in the final quarter of the year. Except for Chinese tourists, local travellers -- December alone features three long weekends -- and other international visitors will be the key drivers.
Stronger baht: We expect foreign funds to continue to flow into Thai equities in December despite certain negative factors. Foreign investors were net buyers of 190 billion baht worth of Thai equities in the first 11 months of this year.
Fed slowdown: The US central bank is widely expected to raise its benchmark interest rate by just 50 basis points when it meets on Dec 13 and 14, after four straight increases of 75 bps. Chairman Jerome Powell and other policymakers have been strongly hinting that a more moderate pace is now justified. The US dollar this week was trading at a three-month low as a result.
Zero-Covid policy: Chinese authorities this week signalled a new phase in their battle against Covid-19, with more selective and less harsh restrictions, after public protests in many cities. But new daily infection rates remain high and global equities and economies, including Thailand, will remain under pressure until the future direction of "zero-Covid" becomes clearer. We expect a strong rebound once the Covid policy is relaxed.
Russia-Ukraine conflict: Even though the market has priced in the impact of the war to a certain extent, the uncertainty it has created about oil and other commodities will likely hang over markets for some time.
DECEMBER OUTLOOK
We believe the SET Index will make an upward move in December because the moving average convergence/divergence (MACD) indicator has flashed a positive signal for the first time in six months. Based on the November trading range (30 points), we expect the index to test 1,670 points this month. A break above this level would open an upside towards 1,700. On the downside, we see support at 1,610 and 1,580 based on the trading range last month.
Investment strategy: We recommend investing in stocks with strong growth stories and those that have braced for steep declines despite bright earnings prospects. Our picks include:
- CPALL (Buy, target 68 baht): Our target price for the 7-Eleven convenience store operator is pegged to a 2023 price-to-book value (PBV) of 33 times, or 0.6 standard deviation (SD) below its five-year average. There is an upside of 1.1 SD to our target price if the number of international tourists returns to the pre-Covid level.
- KCE (Buy, target 58 baht): Our target price for the electronics exporter is pegged to a 2022 price/earnings (PE) ratio of 27.5 times, which is the five-year average for the company. The stock currently trades at an undemanding 22.7 times expected 2022 earnings, while profit might bottom out as the semiconductor supply chain has improved, and Chinese lockdowns are expected to be relaxed next year.
- PORT (Buy, target 2.60 baht): Our target price for the logistics firm is pegged to a 2023 PE of 33 times (five-year average). We believe earnings momentum will build into 2024 on expectations of stronger performance across all core businesses and the prospect of a new port operated by the joint venture Bangkok River Terminal (BRT) to accommodate growing demand.
- SEAFCO (Buy, target 4.50 baht): Our target price for the construction company is pegged to a 2023 PBV of 2.4 times (1 SD below its five-year average). The shares currently trade at 2 times forecast 2023 PBV, which implies 2 SD below the five-year average.
- SNNP (Buy, target 30 baht): Our target price for the snack food producer is pegged to a 2023 PE of 40 times. The stock currently trades at 37.2 times expected 2022 earnings, while core earnings per share are expected to have a compound annual growth rate of 32% from 2022 to 2024. We foresee bright earnings prospects in the long term given an expansion into Vietnam and other new markets.
