The Stock Exchange of Thailand was hammered in June, falling from 1,663.41 points at the end of May to close the month at 1,568.33, a drop of 5.7%. The decline follows those of other markets around the globe, especially the Dow Jones which plunged by almost 10%.
We believe the main factor behind the fall in the SET was inflation which came in at 7.1% in May. Fear of recession in the US added to the concern after the Federal Reserve increased its policy rate by 0.75 percentage points, as the market expected. Messages from the US central bank have been fairly negative, cautioning that it may need to increase the rate by even more than expected later in the year to keep inflation in check.
In the second half of June, the SET dropped below the 1,600 level and hasn't managed to break back above that level since. In the last two days of June, the index plunged almost 2%, or more than 26 points, on recession fears. This trend has continued into this month, and on July 5, the SET reached its bottom for the year at 1,541.30, down another 2% over three trading days.
As Covid-19 now officially has endemic status in Thailand, people are returning to their pre-pandemic lives. According to the Department of Health, new daily cases requiring hospital treatment have ranged between 2,000 and 3,000 and the death rate is below 20 per day. But total reported cases are around 29,000 a day, the Centre for Covid-19 Situation Administration acknowledged yesterday. The vast majority of these patients quarantine at home, receive medicine via post and recover in 5-7 days. In any case, Covid looks to have become less of a concern for the population, or at least not to the point that major shutdowns are required.
INFLATION ALARM
A bigger concern that doesn't appear to have a quick solution is the cost of living. Inflation has climbed steadily, coming in at 7.7% for June, up from 7.1% in May. Fuel prices represent the biggest, broadest cost impact. Benzene is now around 49 baht a litre, gasohol 95 is 41.5 baht and diesel is at its peak control level of 35 baht.
We expect the government to lift the ceiling for diesel to 38 baht as the Oil Fund has run up a debt of more than 100 billion baht.
Cooking gas is another major concern as the price will increase by 15 baht per 15-litre tank for another three months starting in July. It will rise again by 45 baht to 408 baht per tank in September. That would bring the total increase to 6 baht per kilogramme since the beginning of the year -- 90 baht per 15-litre tank, or 28.3%.
With inflation on the rise, the Bank of Thailand has signalled that it will increase its interest rate three times in the second half of this year, in increments of 25 basis points at a time, to 1.25% by year-end. This may seem to be a relatively small hike, but the BoT believes inflation locally is controllable and thus there is no need to increase the policy rate as dramatically as the Fed has done in the United States.
Amid this guidance, the baht has fallen past 36 to the dollar for the first time since 2016. While this could help exporters support the economy, high oil prices could exacerbate the negative impact of the weak currency.
Given all these factors, we believe the SET will remain weak in the third quarter and bottom out in August, trading in the range of 1,500 and 1,520 points at its lowest.
We maintain a cautious and selective investment strategy for now. We continue to recommend that investors keep cash at 40-50% of their total portfolio. Our stock picks have not changed much as the main themes remain economic reopening and Covid-proof stocks. This month our choices are BDMS, BEM, KBANK and SMPC.
We continue to like the hospital operator BDMS for its strong performance and upside from rise in Covid cases. With the country opening back up, we expect more patients from the Middle East and the CLMV markets -- Cambodia, Laos, Myanmar and Vietnam. The company is investing around 23 billion baht in BDMS Silver Wellness & Residence, a major project in the middle of Bangkok that is expected to start operations in 2029. The company expects a return on investment in 10-11 years. We see this as a good investment opportunity in a prime location.
TRAFFIC DIVIDEND
We forecast BEM's net profit at 766 million for the second quarter of 2022, almost double year-on-year and up 128% quarter-on-quarter. We recently upgraded our forecasts for 2022-24 to reflect expressway traffic levels that are higher than previously expected. We now expect between 1.1 million and 1.2 million cars per day on the expressway and 260,000 to 340,000 weekday rides per day on the MRT, which the company operates. BEM's performance should improve from the second quarter of 2022 onwards.
Meanwhile, KBANK has announced a joint venture with JMT to set up an asset management company engaged in bad debt management, named JK AMC. Although the size of the investment will be small, this could improve asset quality for the bank itself in the long term. For the second quarter of 2022, we expect KBANK to show better numbers thanks to the expansion of its loan portfolio. We also note that policy interest rate hikes will benefit the banking sector and we see big banks, including KBANK, as the main beneficiaries.
A smaller-cap stock worth noting is SMPC which produces cylinders, mainly for export. The company is a prime beneficiary of the weak baht. We expect sales to improve significantly and second-quarter profit to hit another record high. Net profit is projected at 298 million baht, up 71% year-on-year and 3% quarter-on-quarter. The company also expects to pay a large interim dividend of 0.66 baht a share with a yield of more than 4%. the yield should be more than 7% per year for 2022 and 2023.
