Oversold Thai stock market has recovery potential by year-end

We expect the Thai stock market to recover by the end of this year or early next year. Since September 11, the SET index is down 16.6%, ranking Thailand as the second worst performing market in the region behind the Philippines.

The Thai stock market’s poor performance since hitting a 2001 peak of 342.56 on September 6 has been due to very thin selling pressure and absence of buyers. Most investors stayed on the sidelines waiting for a resolution of the war in Afghanistan and clearer signs on the US economy. With the Taliban regime on its last legs and global markets rising on positive economic data from the US, buyers are beginning to trickle back into the Thai stock market, enticed by a new crop of IPOs. Trading volumes in the last few days have recovered to pre-September 11 levels, with foreigners turning net buyers yesterday of Bt514mn worth of stocks.

We don’t believe the Thai market’s recent decline reflects its fundamentals. Although the Thai economy is expected to slip into negative growth territory in the fourth and first quarters, it is still outperforming most economies in the region thanks to its lower exposure to the high-tech sector and more diversified export base.

Third quarter earnings announcements released just last week were generally mixed, but many companies continue to show improvement in performance due to benefits from debt restructuring. This shows that even in a slow-growth economic environment, many listed companies will not only survive but prosper.

We expect to see the market stage its traditional year-end rally next month, with the SET index pushing past the 300 level either in late December or early January.

• Thai market is the second worst performing market in the region

Since September 11, the SET index has fallen by 16.6%. Major markets in the US and Europe were down similar percentages recently but have since recovered. Confidence is being restored with the retreat of the Taliban in Afghanistan and measures taken by the US government and Federal Reserve to stimulate economic growth, including the reduction of US interest rates to 2% and the passage of a $100bn stimulus package.

• Negative growth of Thai economy expected to last only two quarters

Investors should be aware that this economic contraction won’t be as deep or as long as the 1997-1999 recession. The consensus among economists in Thailand is for economic growth of 1-1.5% in the third quarter. By comparison, the US economy contracted by 0.4% in 3Q01, while Singapore’s high-tech and export-oriented economy shrank by 5.6%. Even if the Thai economy falls into a recession in 4Q01 and 1Q02, we still expect to see economic growth for the full-year this year and next. For 2001, the IMF expects the Thai economy will grow by 2% compared with 1.3% growth for the US and negative economic growth for Japan, Singapore and Taiwan. This is largely due to several factors: 1) Thailand’s relatively diversified export base; 2) a resilient domestic consumer market; and 3) the fact that Thailand didn’t go through the high-tech boom period and therefore, has fewer excesses to wring out.

• Looking for the traditional Santa Claus cheer

Traditionally, the Thai stock market has either risen sharply at the end of the year or the beginning of the new year. The scale of the chart below does not clearly show the percentage gains. From the beginning of December to the high of January the next year, the SET index gained 18% in 95-96, 28% in 97-98, 13% in 98-99, 18% in 99-00 and 24% in 00-01. The only losing period in the last six years was in 96-97 when the SET shed 7%. Given our year-end target for the SET index of 300, 9% above the current level, this is expected to be another year that Santa Claus brings some cheer.

• Long-term support trend will limit downside

Although we are becoming much more bullish on the near-term potential of the Thai stock market, we also want to highlight the fact that the downside risk, at this point, is limited. From 1975, the SET index has been supported by a long-term trend line, which stands at 244-250 at the present.