March was filled with uncertainties for investors. The Russia-Ukraine war, high energy prices, a jump in inflation and new peaks in Covid-19 cases worldwide all buffeted markets.
The war between Russia and Ukraine has yet to let up. The global impact has been longer and more intense than most expected, most notably with higher fuel costs. This upswing has now started to affect fertiliser and wheat, including feed prices.
With the jump in costs, inflation has taken another leg up. In Thailand, headline inflation hit a 13-year high at 5.3% in February and rose to 5.7% in March, with consumers starting to seriously feel the pinch.
On the Covid front, confirmed daily cases in Thailand have been running between 20,000 and 25,000 but most are very mild.
Worldwide, there has been a steady decline in cases, while death rates just 25% of what they were a few months ago.
Indeed, the world now appears to be returning to normalcy with restrictions ending and Covid-19 being reclassified as endemic. Recovery should gain substantial momentum in the second half of 2022 and we should see normalised economic conditions in 2023 when fuel costs and inflation rates slow.
The SET index experienced big swings in March. After starting the month at 1,685 points, uncertainty from the Ukraine crisis and high oil prices kicked the legs out from under the market and the index dove to 1,619. However, backed by high trading volume and robust foreign fund inflows, the SET regained traction and closed March at 1,695.24 points, up a modest 0.6% on the month.
Foreign funds were net buyers of 33.5 billion baht in March, while local institutions and retail investors were net sellers at 17.7 billion baht and 8.8 billion baht, respectively. Average trading volume weakened 2.3% month-on-month to 89 billion baht a day. For the first week of April, the index has hovered around the 1,700 level and turnover has slipped to 60-70 billion baht per day.
But this isn't entirely surprising as April usually has the lowest turnover the year given the number of holidays, in particular Songkran.
With the aforementioned risks still at play, we see the market staying sideways for most of the month. Our strategy revolves around selective buys that help hedge against inflation and stocks of firms that will not see impact from Ukraine-related factors.
FED IMPACT MINIMAL
Looking at US Federal Reserve rate hikes and its balance sheet reduction, which should begin in May, we see only limited impact on the Thai market. In our base case, we expect the Fed to increase its policy rate to a range of 1.75% to 2.00% by the end of 2022 and to 2.50-2.75% by the end of 2023. The balance sheet reduction is expected to be around $100 billion per month.
Our SET investment strategy remains centred on selective buys and domestic-focused businesses, namely BBL, BCH, MINT, PTTGC and SPVI.
BBL has been a consistent top pick for us among the big banks. Its fundamentals are strong and the valuation is still relatively cheap at a price to book value (PBV) of only 0.5 times.
We also expect earnings in the first quarter to be strong, though growth may not be exciting quarter-on-quarter. We expect gradual performance improvement throughout the rest of 2022.
We also note that high oil prices should steepen the yield curve, benefiting banks in the short term. BBL has also announced a dividend payment of 2.50 baht, with XD on April 21, implying a yield of 2.6% on 2021 earnings. Our estimates point to a healthy yield of around 4% for the next two years.
In the hospital sector, we see benefits from both Covid-related revenue and normalisation of non-Covid operations at BCH. In the fourth quarter, the company booked more than 100% growth in non-Covid revenue while revenue related to Covid-19 also continued to rise. With the Omicron variant still very active in Thailand, Covid cases have yet to decline.
We also saw revenue from foreign patients jump 42% for BCH, mainly from the Middle East. And there is plenty of upside as the huge Chinese patient market remains absent given travel restrictions in China.
TOURISM RECOVERY
Tourism is another theme that cannot be ignored at this end-stage of the pandemic. MINT should benefit from the ongoing reopening and normalisation of economic activity in European countries.
Though the numbers are still low relative to the pre-pandemic era, the gains are very encouraging. Now with the pre-departure RT-PCR test requirement being dropped, we anticipate an even greater tourist influx. Thus, we expect MINT to turn a profit in 2022 after posting huge losses in 2020-21 and see the stock as a solid pick for the recovery theme.
Meanwhile, high oil prices spell lower margins for the chemicals industry and a hit to the profit of PTTGC. However, the stock's valuation has come down to an attractive level, with PBV at only 0.7 times compared to its average of 1.0. At this level, most downside risks have been accounted for. Note also that PTTGC is set to book a stock gain of 4 billion baht for the first quarter.
Finally, we like the domestic play SPVI and project continued earnings growth in 2022-23 even after it booked huge growth of more than 70% in 2021.
The company has the largest market share in the educational segment, boasting 24 stores in universities nationwide, and plans to open another 10 branches this year. While peers COM7 and CPW are trading at 29 and 43 times, respectively, SPVI is trading at an attractive price/earnings ratio of 18 times.
