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Rough start to October

The Stock Exchange of Thailand has found no solace so far from the formation of the new government, having fallen heavily over the month of September.

During the month, the government enacted several policies to help ease the cost of living, one of the biggest being the reduction of electricity bills to 3.99 baht per unit (kilowatt/hour) from 4.45 baht, effective until the end of the year. The move to bring the tariff below 4 baht was a big surprise.

Another surprise came from the Bank of Thailand, which went against the consensus with another increase of 25 basis points in its policy interest rate to 2.5%. Most market professionals believe this will be the terminal rate for the central bank.

The government also moved to lower the diesel price to 29.99 baht per litre to help with transport costs and ease cost pressure on downstream products. While these policies will indeed help with the cost of living, it will be at the expense of the energy sector’s profits.

Meanwhile, the US 10-year Treasury yield increased to 4.6% in late September, while the SET’s earnings yield gap slimmed to only 2.92%. Against this backdrop, the SET plunged 6% month-on-month to close September at 1,471.43 points, its low for the month, with average daily turnover down 15.7% from August to only 47.9 billion baht.

October started on the wrong foot with the SET Index plunging 32.98 points or 2.2% in the first week. Bangkok experienced a shock in the form of the shooting at Siam Paragon on Oct 3, which left two people dead and five injured. We note that one of the victims of the gunman at the luxury mall was a Chinese tourist; this news is likely to harm tourist sentiment, at least in the short term.

Then, on Oct 6, war broke out between Hamas and Israel, dampening the investment outlook for markets worldwide. The surprise attack by Hamas and subsequent retaliation caused the prices of oil and gold to shoot up, adding to market anxiety.

The Hamas-Israel war also comes just after Thailand launched its visa-free programme for tourists from China and Kazakhstan, running from Sept 25 to Feb 29 next year. With all the bad sentiment surrounding the market, the SET fell to its lowest level of the year at 1,423.17 points on Oct 9.

WAIT, AND BE SELECTIVE

Given all of the above, our investment strategy has become even more selective. We recommend not going overweight on stocks for now as a better time for accumulation could emerge around the end of the month when previews of third-quarter results come out and we get a sense of earnings sentiment for the rest of the year.

We expect the Bank and Energy sectors to perform well in light of high interest rates and high oil prices during the third quarter. Our investment picks for the month are BBL, SPA, PTTEP and TOP.

Bangkok Bank (BBL) is still a prime beneficiary of the high interest rate environment and should generate a third-quarter profit of 11.3 billion baht, an increase of 47.9% year-on-year and 0.3% quarter-on-quarter. As BBL increases its rates, it enjoys a higher net interest margin. Moreover, its corporate loans, including international loans, are still growing. Finally, its investment in the Indonesian lender Permata will give the bank a cushion against slow domestic loan growth.

In the services space, Siam Wellness Group (SPA) is a beneficiary of the tourism recovery and its main customers are Chinese visitors. With the visa-free campaign and overall recovery of Thailand’s tourism industry, we expect the company’s profit to ride an uptrend. For the second quarter, SPA made a profit of 60.1 million baht and we expect third-quarter earnings to grow another 10% to 66 million baht. The company will open four branches in the second half of 2023 as we enter the high season for tourism and consumer spending. Overall, we see good prospects for SPA.

On the energy front, PTT Exploration and Production (PTTEP) will be a beneficiary of any further gains in oil prices sparked by the Israel-Hamas war. We expect the company to book a third-quarter profit of 20 billion baht, up slightly quarter-on-quarter. Oil prices look to remain high for the rest of the year and we believe PTTEP will ride the positive sentiment. Note also that global crude inventories are currently below the five-year average. With Saudi Arabia extending its oil production cut to year-end, we could see the world oil price go beyond $90 per barrel, opening further earnings upside for PTTEP.

Another beneficiary of high oil prices is Thai Oil (TOP). Although it currently faces the challenges of an oil spill, insurance should be able to cover all the losses. In addition, its gross refining margin for third quarter hit a peak at around $27 per barrel, well above the five-year average of just $16.20. High crude oil prices mean TOP should be able to book inventory gains as well. With sentiment upbeat, TOP is our top pick for refineries.

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