The SET moved mostly sideways in July, opening at 1,568.33 points and closing at 1,576.41, representing just a 0.5% month-on-month rise. That said, there was a period during the month when the index took quite a swing, reaching a low of 1,517.51 in mid-July before rebounding to its peak of 1,576.68 before closing at 1,576.41.
Recession was the key concern during the month, alongside high inflation, high energy prices and the rising interest rate environment, both in Europe and the United States.
Economic activity during July was subdued due to the large number of holidays during the month, further depressing the mood for investment. Average daily turnover was just 58.3 billion baht, down 13% month-on-month and marking the lowest monthly average for the year. Foreign and retail investors were net buyers in July at 4.7 billion baht and 5.5 billion baht, respectively. Local funds, meanwhile, were net sellers of 9.8 billion.
Though the US Federal Reserve increased its interest rate by 75 basis points, in line with market expectation, investors now anticipate that further increases will be less aggressive. This should cool the global investment climate.
For now, the main concern in Thailand is still the cost of living. But we note that July seems to have marked a peak in a number of indicators. The baht weakened throughout the month, reaching almost 37 per dollar. However, towards the end of the month and into early August, it regained strength to 35.10 and is now trading around 35.50.
Inflation in Thailand was 7.7% year-on-year in June and that depressed the trading environment. Consumer price inflation edged down marginally to 7.6% in July, and the investment mood brightened a bit in early August as a result. Indeed, our economist now believes we have seen the peak for domestic inflation.
INFLATION PEAKING
Oil price movements have also been encouraging. West Texas Intermediate (WTI) crude has fallen from its peak of US$110 to below $100 per barrel as of early July and to below $90 as of early August. Many commodities appear to have also passed their peak in June and July and have fallen more than 20% since then.
This indicates that the overall inflation peak has passed and we could expect a material decline in official readings starting in August.
However, the Electricity Generating Authority of Thailand is set to announce an increase to its fuel tariff (Ft) rate of 0.68 per unit, raising the total tariff to a record 4.72 per unit (kilowatt/hour). However, Prime Minister Prayut Chan-o-cha has already said authorities will find a way to subsidise the higher Ft cost at least for the next few months to ease people's living costs.
In addition, cooking gas prices have increased by another 45 baht for the July-September period, bringing the price of a 15kg tank to 408 baht, up 28% from 318 baht in early 2022. These hikes imply that food prices will rise in the third quarter.
So far this month, trading sentiment on the SET has improved substantially, pushing the index up from 1,576.41 to 1,620.98 points over the first 10 days. Average daily turnover has also improved by 8% to 63 billion baht. Foreign investors already have a net-buy position of more than 15 billion baht for the month compared to only 4.7 billion for all of July.
We see this as an opportunity to reduce portfolios rather than accumulate stocks, particularly as we are nearing the end of the second-quarter results season. Results overall should be good as the bulk of the impact from high costs and high inflation should manifest in the second half of the year.
Another risk to the market is that there is a high chance of listed company earnings forecasts being revised downward. This is because most analysts upgraded their forecasts early this year before inflation really started to heat up and affect costs. Consequently, we see a current trading range for the SET between 1,580 and 1,620 points.
Our recommendations revolve around stocks with potential to post strong results. Our picks include BANPU, CK, COM7 and EGCO.
In the energy sector, BANPU is primed for a superb year with earnings projected at 28 billion baht, representing 128% year-on-year growth. This is thanks in large part to the huge rise in coal prices. The company recently bought a gas rig from XTO Energy of the US and will reduce its coal revenue to only 50% of its total from 66% currently as it seeks greater exposure to the clean energy businesses. Second-quarter profit came in almost 10 times higher than a year earlier.
TOP CONTRACTOR
For the contractor CK, we expect second quarter earnings to jump 119% year-on-year and 268% quarter-on-quarter, catalysed by a bigger dividend from TTW and an increasing contribution from BEM. While the current backlog of CK is 61 billion baht, we expect the company to win new projects in the near term, raising its backlog to more than 100 billion baht. These include a project in Luang Prabang, Laos, valued at 8-9 billion baht, for which bidding will open later this year. CK is our top pick for contractors.
In the information and communication technology space, the share price of the IT retailer and distributor COM7 has fallen more than 15% year-on-year despite the prospect of attractive earnings growth of 19% this year. Second-quarter profit should also be decent, rising 15% year-on-year. COM7 has increased its branch count to 1,062, boding well for sales growth of 21% year-on-year to 14 billion baht. The company has also invested in SABUY and set up a joint venture with the hospital operator BDMS to expand its business base. Note, however, that these ventures will need one or two years before contributing to earnings. COM7 is currently trading at a price/earnings ratio of only 23 times, making it a good value stock.
Given the current economic volatility and risk of earnings downgrades, we recommend defensive stocks. EGCO fits the bill here. The power generator's earnings in the second quarter should increase by 46% year-on-year, in our estimate. EGCO has many new projects it plans to deliver this year, including the Nam Theun power plant in Laos, in which it holds a 25% stake, and the TPN oil pipeline project (45% stake). With a steady profit trend and good dividend of 4-5% per year, EGCO is a solid defensive stock to add to your portfolio.
