The SET staged a big recovery in October from its poor performance the month before, establishing a new support level at 1,600 points. The trading range was between 1,553.80 and 1,619.08 with a close at 1,608.76, up 19.25 points or 1.2% on the month.
In the first half of October, the SET was still pressured by expectations of further interest rate increases by the US Federal Reserve. The prospect of more aggressive Fed moves depressed the investment climate worldwide, pushing the SET down to 1,553.80 at mid-month.
The tide turned, however, when third-quarter bank results in both the US and Thailand beat expectations. Later in the month, more positive sentiment about higher interest rates helped push the SET beyond the 1,600-level where it has stayed until now.
We note that average daily trading turnover slumped 14.7% month-on-month to only 59.4 billion baht in October.
After the Fed increased its policy rate by another 75 basis points in early November, bringing its range to 3.75-4.00%, the market turned more neutral, with the expectation of a hike of only 50 basis points in mid-December. But at the same time, the market now expects a terminal rate of 5.25%, up from 5% forecast earlier.
This could mean that the fight against high inflation will be long and a recession, at least in the US, could thus be unavoidable. Importantly, many US economic indicators have been worse than market expectations, including the purchasing managers' index (PMI), housing sales and housing prices.
These indicators actually raise market hopes that the Fed will ease its rate-hike regime going into next year. Indeed, we could see inflation coming in under 8%, from its peak of 9.1% recently. The 7.7% figure for October was a move in the right direction, and Wall Street responded on Thursday with a massive rally. These factors could bolster investor confidence in equity markets.
In Thailand, even though the SET was down 3% for the year to Oct 31, this was much better than major global markets which are down by anywhere from 5% to 36% (UK -5%, US -18%, MSCI World -22% and Hong Kong -36%).
POSITIVE FACTORS
From now until early next year, Thailand has a number of noteworthy positive factors for market sentiment, starting with the coming general election and the ongoing revival of tourism. The election must take place no later than May 7 as the current government's four-year term ends in March. Many parties are already in serious campaign mode. Our analysis shows that historically, in the six months prior to a general election in Thailand, the SET gains 5-6% on average.
On the tourism front, international arrivals in October were estimated at around 2 million, making it the best month since before the pandemic. November and December should be even higher and thus total arrivals for 2022 could top 10 million. For 2023, we forecast arrivals at 24 million, still far from the pre-Covid level of 40 million, but a big improvement from below 1 million in 2021. These two factors should bolster Thailand's economic conditions and ensure that even if there is a recession, it would be less severe than in other parts of the world.
With the SET holding its ground above 1,600, we see positive prospects over the rest of the year. Our investment theme is now focussed on stocks poised to record strong earnings into the fourth quarter and those positioned to ride current trends to year-end. Our picks include AU, BDMS, COM7, CPALL, SCB and TLI.
First, we expect the popular dessert restaurant operator AU to turn a profit in the third quarter. Although the profit should be small, outdoor activities have fully resumed and the festive season is approaching, spelling a strong recovery for the fourth quarter. The continued revival in tourism, meanwhile, should lead to 65% profit growth in 2023.
MEDICAL TOURISM LIFT
In the healthcare space, we still like BDMS as a key beneficiary of medical tourism to boost revenue over the rest of the year. Earnings for the third quarter should grow by 17% year-on-year while we estimate full-year earnings growth at 33%, followed by another 15% gain in 2023. BDMS is also a defensive stock during periods of high inflation.
Turning to COM7, we expect the launch of the iPhone 14 to be a profit enhancer for the tech retailer. We forecast profit of 655 million baht for the third quarter, up 15% year-on-year and 8% quarter-on-quarter. Supporting sales performance is the company's plan to expand its branch network from 958 to 1,099. In addition, it targets sales growth of 20-35% year-on-year from more product launches. All things considered, we believe COM7 will grow more than 15% per year.
CPALL has been a laggard this year, underperforming the SET by 12%. But with overall economic conditions improving after the removal of Covid lockdowns, and outdoor activity increasing, the 7-Eleven operator will benefit immensely from its nationwide presence.
In response to higher utility costs, especially electricity, CPALL has stepped up cost controls, including the use of solar rooftops as a power source. We expect healthy profit growth of 17% this year and 35% next year, and believe the stock is trading well below its fair value.
Among commercial banks, SCB is one of our top picks. Its third-quarter earnings rose 3% quarter-on-quarter and 17% year-on-year to 10.3 billion baht, supported by improving credit costs and net interest margin. Rising interest rates also benefit big banks like sector laggard SCB.
Finally, we recommend the insurer TLI as the stock is set to enter the MSCI Global Standard at the end of November. The currently high bond yields should benefit TLI in the short term.
For the fourth quarter, we expect good results from seasonality as people tend to buy insurance more at the end of the year to save on tax and also after receiving salary bonuses.
