11 1 Strategic Thesis The euro is like a ticking time bomb whose fuse keeps getting extended. This will make the world like a person suffering from shortness of breath. The ECB is at its wit’s end on how to deal with the situation. Of late, it had lent to banks EUR489 bn in an attempt to assuage the tight money market conditions. If left un-dealt with, a growing liquidity problem will eventually lead to a solvency problem. In a nutshell, while the ECB is not admitting towards doing another round of quantitative easing (QE), its actions certainly attest to such measures. Judging by M2 growth, the EU is not much different from Japan. The nerve wrecking state of affairs will hold risk assets hostage for longer and support further upside on USD/THB. While the US looks better on a relative basis, its job market will require the Fed to resume expanding its balance sheet post Operation Twist in June 2012. Hence developed markets continue to monetize their debt whilst Asian central banks try to sterilize their monetization. The burning question locally is whether the administration’s move to reverse fiscalization of FIDF losses equates to its monetization. If it does, we will have to give a serious rethink about USD/THB trajectories. Hopefully, authorities would come to the conclusion that shifting a burden around doesn’t achieve much as long as it is being shifted in the same boat. Long-term bond yields saw little increase in 2011 despite of policy rate hikes and reduction in trading volume in the second half. However, such low borrowing costs are not likely to stay as the government plans large amount of bond issuance and financing. There are risks of yield curve steepening while bond demand is less certain. As for policy rate, we continue to expect a 25bp cut in the next MPC meeting in January while BoT’s latest outlook on 2011 economic growth also suggests that further easing is possible. In anticipation of market volatility in 1Q12, we recommend active investors focus on high- yield stocks such as CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW and BAFS. Kobsidthi Silpachai, CFA –Kasikornbank [email protected]Susheel Narula – KSecurities [email protected]Kavee Chukitkasem – KSecuri es ti [email protected]KResearch [email protected]f Euro and contagion worries uplift USD and depress risk assets…again and again…. f Based on M2 money supply growth, the US looks better than the EU and Japan…but is that saying much? f Jobs overhang and ending Operation Twist will rekindle Fed QE in 2Q12 and again weigh on USD f …but we hope local authorities juggling of FIDF losses don’t equate to our own version of debt monetization f Dovish external and internal factor nudges us to look for another 25bps cuts in the repo at January’s MPC f Due to post-flood renovation efforts, plus governmental economic stimuli, the Thai economy could experience a V- shaped recovery, after bottoming out in 4Q11 f On equities, we recommend active investors focus on high-yield stocks e.g. CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW and BAFS KBank Multi Asset Strategies The euro: a time bomb with extendable fuse Strategies Macro / Multi Asset January 2012 Volume 54 WWW.KASIKORNBANKGROUP.COM “KBank Multi Asset Strategies” can now be accessed on Bloomberg: KBCM <GO> Disclaimer: This report must be read with the Disclaimer on page 48 that forms part of it
Transcript
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Strategic Thesis The euro is like a ticking time bomb whose fuse keeps getting extended. This will make the world like a person suffering from shortness of breath. The ECB is at its wit’s end on how to deal with the situation. Of late, it had lent to banks EUR489 bn in an attempt to assuage the tight money market conditions. If left un-dealt with, a growing liquidity problem will eventually lead to a solvency problem. In a nutshell, while the ECB is not admitting towards doing another round of quantitative easing (QE), its actions certainly attest to such measures. Judging by M2 growth, the EU is not much different from Japan. The nerve wrecking state of affairs will hold risk assets hostage for longer and support further upside on USD/THB. While the US looks better on a relative basis, its job market will require the Fed to resume expanding its balance sheet post Operation Twist in June 2012. Hence developed markets continue to monetize their debt whilst Asian central banks try to sterilize their monetization. The burning question locally is whether the administration’s move to reverse fiscalization of FIDF losses equates to its monetization. If it does, we will have to give a serious rethink about USD/THB trajectories. Hopefully, authorities would come to the conclusion that shifting a burden around doesn’t achieve much as long as it is being shifted in the same boat. Long-term bond yields saw little increase in 2011 despite of policy rate hikes and reduction in trading volume in the second half. However, such low borrowing costs are not likely to stay as the government plans large amount of bond issuance and financing. There are risks of yield curve steepening while bond demand is less certain. As for policy rate, we continue to expect a 25bp cut in the next MPC meeting in January while BoT’s latest outlook on 2011 economic growth also suggests that further easing is possible. In anticipation of market volatility in 1Q12, we recommend active investors focus on high-yield stocks such as CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW and BAFS.
Euro and contagion worries uplift USD and depress risk assets…again and again….
Based on M2 money supply growth, the US looks better than the EU and Japan…but is that saying much?
Jobs overhang and ending Operation Twist will rekindle Fed QE in 2Q12 and again weigh on USD
…but we hope local authorities juggling of FIDF losses don’t equate to our own version of debt monetization
Dovish external and internal factor nudges us to look for another 25bps cuts in the repo at January’s MPC
Due to post-flood renovation efforts, plus governmental economic stimuli, the Thai economy could experience a V-shaped recovery, after bottoming out in 4Q11
On equities, we recommend active investors focus on high-yield stocks e.g. CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW and BAFS
KBank Multi Asset Strategies The euro: a time bomb with extendable fuse
Strategies Macro / Multi Asset January 2012 Volume 54
WWW.KASIKORNBANKGROUP.COM
“KBank Multi Asset Strategies” can now be accessed on Bloomberg: KBCM <GO>
Disclaimer: This report must be read with the Disclaimer on page 48 that forms part of it
US 2yr yields and implied forward US 5yr yields and implied forward
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
2yr yields, % implied forwards
012345678
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
5yr yields, % implied forwards
Source: Bloomberg, KBank Source: Bloomberg, KBank
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5
KBank EUR/THB model KBank JPY/THB model
34.036.038.040.042.044.046.048.050.052.054.056.0
01 02 03 04 05 06 07 08 09 10 11 12
actual model
EUR/THB
25.027.029.031.033.035.037.039.041.043.0
01 02 03 04 05 06 07 08 09 10 11 12
actual model
JPY/THB
Source: Bloomberg, KBank Source: Bloomberg, KBank
KBank GBP/THB model KBank CNY/THB model
43.048.053.058.063.068.073.078.0
01 02 03 04 05 06 07 08 09 10 11 12
actual model
GBP/THB
4.04.24.44.64.85.05.25.45.65.8
01 02 03 04 05 06 07 08 09 10 11 12
actual model
CNY/THB
Source: Bloomberg, KBank Source: Bloomberg, KBank
KBank THB/VND model KBank AUD/THB model
300350400450500550600650700750800
01 02 03 04 05 06 07 08 09 10 11 12
actual model
THB/VND
21.023.025.027.029.031.033.035.0
01 02 03 04 05 06 07 08 09 10 11 12
actual model
AUD/THB
Source: Bloomberg, KBank Source: Bloomberg, KBank
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The West monetizes, Asia sterilizes
New Year, Same Old Problems, and more on the way
Conservatives would say their “businesses make money the old fashion way, they earn it”. What can be said about a growing number of central banks around could be “they make money the new way, they print it”. It is understandable that readers are most likely fed up about hearing problems in Europe again and again. Unfortunately, the reason why it is being heard again and again is because the problem is structural and not cyclical (some that goes up and down and is more predictable than a structural issue). The problems in Europe will hold the rest of the world as hostage since it is a very large market indeed (about slightly larger than the US economy).
The ECB is at its wit’s end on how to deal with the situation. Of late, it had lent to banks EUR489 bn in an attempt to assuage the tight money market conditions. If left un-dealt with, a growing liquidity problem will eventually lead to a solvency problem. In a nutshell, while the ECB is not admitting towards doing another round of quantitative easing (QE), its actions certainly attest to such measures. Credit spreads are rising and credit ratings are falling. Fig 1. ECB balance sheet is expanding Fig 2. A jump in long term refinancing amount
It seems that after piling into the bonds of PIIGS and company, with little success of keeping these sovereign government cost of funding from skyrocketing, the jump in the long term refinancing facilities is hoped to kill two birds with one stone i.e. 1) ease the tight money market conditions within the European commercial bank system and 2) that the commercial banks would on lend to the governments . The important point is that this is not a cure but only a pain killer whose effects will wear off.
One indicator that tells us that the EU has more replicated Japan is the growth rate (or lack therefore) of money supply, primarily M2. Rising M2 money supply is a gauge that more money is changing hands and hence is a indication of a pick up in economic activity as well as inflation. Fig 4 shows the case of the US, whereby if we assign M2 money supply as the independent variable (x, or horizontal axis) and CPI (consumer price index) or inflation as the dependent variable (y, or vertical axis), money supply growth explains about 94% of the changes in inflation. M2 money supply growth is probably one reason why the market is more optimistic about the US economy relative to the EU and Japan. Fig 4. M2 money supply and inflation, the case of the US
Fig 5. M2 money supply growth, the Japanification of the EU?
The ill omen for Thai businesses that conduct lots of business with the EU, will or already have felt the pinch on declining exports is seen on fig 6. Fig 6 shows that the EU economic lead indicators precede, by and large, the rise and fall of Thai exports to that region. Of late, November’s Thai exports to the EU has declined to USD 1,386mn, which can be reflective of both the demand side (EU’s ability to consume) and supply side (Thai producers’ ability to supply amidst flooded production facilities). Fig 6. Thai exports to the EU feeling the pressure Fig 7. Thai production index…the flood feeling
Fig 8. Thai exports comparison to previous periods
Thai export destinations Latest data (USD mn) as % of total
vs 1 mth earlier
vs 3 mth earlier
vs 6 mth earlier
vs 1yr ago
Japan 1,741 11.4 -7% -24% -17% -9% USA 1,558 10.2 -7% -23% -20% -14% Canada 126 0.8 -5% -24% -17% -11% Mexico 84 0.5 -28% -34% -6% 0% Australia 482 3.2 -20% -38% -13% -34% China 1,816 11.9 -21% -33% -14% -10% Hong Kong 722 4.7 -25% -46% -50% -44% Indonesia 646 4.2 -24% -21% -19% 3% Philippines 417 2.7 16% -15% 5% -1% South Korea 291 1.9 -14% -30% -29% -11% EU Countries 1,386 9.1 -19% -38% -34% -28% other ASEAN Countries 4,054 26.5 -5% -22% -15% 3% Middle East Countries 588 3.8 -19% -39% -37% -32% Others 1,376 9.0 26% -3% -8% -10% Total 15,287 100.0 -10% -27% -21% -13% Source: Bloomberg
Asian central banks sterilize what the West monetize While the US economy from a monetary perspective looks better…but the “better” is a relative term. The jobs market remains an issue and unfortunately, it is a structural issue. Sure, the first Friday’s non-farm payrolls printed 200k versus economists expectations of 155k, the number of people in the non-farm jobs are still 6 million short of peak of 2008 while most people out of a job for longer, about 40.8 weeks. This is an attestation that the unemployment issue is structural and not frictional. Fig 9. US non-farm payrolls are still 6million short of 2008 peak
Once the end of the Fed’s “Operation Twist” draws to a close in the middle of this year, the market will be anxious (again) for another round of Quantitative Easing (QE). Operation Twist was bullish for the US dollar since Fed would refrain from expanding its balance sheet and hence printing money as it rotates short term assets into longer term assets. But with the jobs markets remaining in a dismal state of affairs as well as an
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election year, the Fed is not expected to stand idly by and hope that things fixed themselves. As for the ECB, given that refinancing needs of the weaker links within Europe, unless Germany and France can pull a rabbit out of the hat and bring about fiscal union, the burden will remain on the monetary side, i.e. ECB. Italy, Spain, Greece, Portugal and Ireland will have EUR 568.6 bn of debt maturing will need to be refinanced. Fig 11. 2012 maturing debt of PIIGS Fig 12. Bigger PIIGS can not afford market funding will
In the August 2011 edition of our research we has discussed that debt monetization was a cheat sheet for highly indebted nations. In a nutshell, governments which continue to borrow heavily will force the hand of its central banks to intervene in the bond market in order to reduce the crowding out effects. Government borrowings will tend to drive interest rates higher and increases cost of private investments. Hence central banks will print money and use these funds to buy its government bonds. As the central bank prints money, inflation will rise to a point higher than the bond yields i.e. negative interest rates which means debtors gain at the expense of creditors (investors). Fig 13. The West monetize and the East sterilize Fig 14. Post the dust settle, USD/THB would decline
Here, we wanted to add the external angle as shown on fig 13. This chart shows that as both the ECB and Fed print more currency, it tends to end up at Asian central banks vaults in the form of current account surpluses or capital inflows. In an endeavor to limit effect of spill over of inflation, the Asian central banks will sterilize the flows.
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Will the Thai Central Bank have to monetize as well? Unfortunately for the Thai currency, a recent development raises the risk of further weakening in addition to the lack of risk appetite owing to the impending break up of the euro. The current government is mulling in principle to relocate the cost of the 1997 financial crisis out of the government budget to possibly the Bank of Thailand or the Financial Institution Development Fund (FIDF). As the fiscalization of the closed financial institutions is closed to a decade in the making, the following is Bank of Thailand circular to get readers better acquainted with this issue.
In accordance with several measures implemented by the Government and the Bank of Thailand to resolve the economic and financial crisis and restore stability and public confidence in financial institutions, the Financial Institutions Development Fund (FIDF) has been given the responsibility to administer such measures. These included the full guarantee of depositors and certain creditors of financial institutions pursuant to the cabinet resolution on 5 August 1997, and the Financial Sector Restructuring Plan pursuant to the cabinet resolution on 14 August 1998 involving bank recapitalization and other rehabilitation measures. As a result, the FIDF has been put under a problematic financial situation, with liquidity shortages and substantial losses. The actual as well as estimated future losses from operations are as follows:
Breakdown of estimated losses classified by type of assistance Type of assistance Net losses (THB mn) 1. Assistance to depositors and creditors and liquidity support (56 closed finance companies and other financial institutions)
554,149
2. Losses from recapitalization in intervened financial institutions 169,139 3. Losses from managing non-performing assets 650,750 4. Interest and other expenses 165,975 less FIDF premium (138,563)
1,401,450
The Bt 1.4 trillion estimated total loss has already been partially fiscalized by the issuance of Bt 500 billion worth of government bonds in 1998 with total receipt of Bt 512,824 million. However, the remaining Bt 88,626 million has yet to be fiscalized. In 2000, the Government gave assistance to the FIDF by providing MOF guarantee on Bt 112 billion of FIDF bonds. The interest expense on these bonds has been paid for from the government budget. This assistance, though helping to reduce the FIDF’s interest burden and restructure its liabilities, has not completely resolved the losses of FIDF. Resolution Principles In the process of resolving FIDF losses, the Ministry of Finance and the Bank of Thailand jointly agreed on the principles that the resolution must be clear, acceptable to all parties, and has minimal impact on the Government’s fiscal position and minimal burden on taxpayers in both short and long terms. The resolution must be transparent, must be in keeping with good governance and has minimal adverse impact on the bond market. In order to completely resolve the problem, the resolution of the losses has 2 components:
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1. The fiscalization of uncompensated losses 2. The redemption of the Bt 500 billion government bonds. Resolution Methodology (1) On 21 June 2002, the Government passed an Emergency Decree empowering the Ministry of Finance to issue bonds up to Bt 780 billion to fiscalize actual FIDF losses. In order to comply with the resolution principles, the Ministry of Finance will be responsible for the interest expense to be paid for from the budget. As for the amortization of the principal, the Bank of Thailand will meet this obligation by using annual net profits from Currency Reserve from 2002 onwards. A separate account will be set up within the Bank of Thailand’s General Account to keep such profits in order to ensure the transparency and accountability of this operation. The use of the profit flows from the Currency Reserve will not affect the levels of international reserves. (2) As for the redemption of the Bt 500 billion bonds issued according to the Emergency Decree Empowering the Ministry of Finance to Borrow and Administer the Borrowing to Assist the Financial Institutions Development Fund B.E. 2541, which stipulated that the amortization is to be funded by the privatization proceeds and 90% of net profits of Bank of Thailand’s General Account operations, very little proceeds have been received so far from the privatization program. Meanwhile, the Bank of Thailand’s General Account continues to accumulate losses since the 1997 currency stabilization policy. To ensure that the Bank of Thailand has the capacity to remit profits to the government for this amortization, two Emergency Decrees were passed to eliminate the accumulated losses and to allow the use of assets in the Special Reserve Account for backing issued banknotes such that the Bank of Thailand will have more flexibility in managing its assets to generate earnings and profits as well as will increase its efficiency in implementing monetary policy. Bond Issuing It is expected that the size of the new government bonds issuance will not exceed Bt 780 billion and the issuing time frame will be set according to FIDF’s cash requirement. Market conditions will also be taken into account in order to minimize the impact on the bond market. Between August and December 2002, FIDF’s obligations of Bt 115 billion to pay depositors of the 56 closed finance companies will fall due and its outstanding borrowing from the repurchase market is Bt 300 billion. Consequently, the FIDF would need to issue a large amount of bonds. In order to minimize the impact on the bond market, the Government will instead offer saving bonds with 5-, 7- and 10-year maturities with the total size of Bt 300 billion to specific groups of savers who currently do not transact in the money market, namely individuals, cooperatives and foundations. These saving bonds will not only resolve the FIDF’s losses incurred from providing assistance to the financial institutions but also serve as an alternative investment option for retail investors, which offers higher yields with longer maturity than commercial banks’ deposits. The saving bonds can be purchased via commercial banks’ branches nationwide serving as selling agents. Subscription period of 45 days will be between July 15 - August 30, 2002 and the 45-day settlement period will be from September 2 –
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October 15, 2002. Subscribers will be able to choose their preferred settlement dates so that they can plan to reinvest their maturing time deposits or other investments in the saving bonds.
As of October 2011, Thailand’s public debt was THB4.33 trn or about 41% of GDP. Will it could be argued that Thailand is no Greece and public debt / GDP is still below the Maastricht treaty threshold o 60%. However, the contentious variable is the 15% debt service ratio i.e. debt service as a percent of the budget. It is no wonder as to why administrations become concerned about rising interest policy rates and attempt to prod the central bank to cut rate as to give more flexibility with regards to this self imposed covenant. The Public Debt Management Office (PDMO) projects that the debt service ratio to rise to 11.5% in 2012 and could reach 13.4% by 2016. Given that 2011 flood has raised serious questions of Thailand as a safe place while the administration has cited the flood as a natural disaster and as a consequence, brand Thailand as a disaster prone area, investors’ confidence needs to be restored to get back to “Business as Usual”. As such, funds are needed to compensate for the growing budget deficit trend to stimulate the recovery. Fig 15. Thai public debt Fig 16. 12mth running budget balance
The news flow remains fluid as to whether or not the FIDF losses would be relocated to the fund itself but legal amendments would empower the fund with an income stream to service the debt. In a nutshell, the movement seems to be a reserve fiscalization of the losses, which could strongly imply a move forward monetizing the FIDF losses. Moody’s Investors Service has just made disclosure with regards to Thailand’s credit rating albeit no mention of this event. Moody’s noted that:
Thailand's Baa1 government ratings reflect medium economic and institutional strength, but receive support from a relatively high level of government financial strength as the post-1997 crisis debt overhang has eased. Vulnerability of the government's balance sheet to external shocks has been reduced by a steady repayment of external debt and accumulation of official foreign exchange reserves. External indicators are considerably stronger than the median values of not only Baa peers but also many A-rated countries. However, Thailand's government debt relative to government revenue is more elevated than its Baa-rated peers, although the debt trajectory at both the
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general government and public sector levels was on a steady downward trend prior to the global recession.
Given that a balance sheet as to balance i.e. Asset = Liabilities + Equity, a relocation of the FIDF losses back to the Bank of Thailand would have rather negative implications. Since the fluid developments would suggest that the Bank of Thailand’s liabilities would increase whilst Assets are unchanged, what needs to adjust is its Equity. Fig 17 and 18 are figures released by the Bank of Thailand and may not fully reflect its true equity. For example, its financial statements audited by the Auditors’ General for 2010 showed a negative equity of THB 81.8 bn since it reflects the marked to market effects. Note that the BOT’s equity will fluctuate for several reasons. For one, its assets are largely foreign currency whilst its liabilities are local currency. If USD/THB moves down, so does the BOT’s equity, and vice versa. Another reason is interest rate differentials between yield on assets and the cost of its funding of those assets. Given that US and other countries in which the BOT invests in are developed markets will tend to have lower rates than Thailand’s emerging markets, the BOT will incur a natural negative carry and weighing on its equity as time passes by. We have are trying to point out is that in its current form, the BOT’s financials are design to deteriorate for the gains in FX and price stability. But of course it makes sense since the Bank of Thailand a central bank and not a commercial bank. Given this assessment, there is little problem that the BOT’s balance sheet can generate income to cover the FIDF losses and strongly suggest that the only way to reduce this interest paying debt is refinancing…either with interest bearing paper or simply non-interest bearing paper…also known as “currency in circulation”. The other ominous alias would be “monetization”. We hope that authorities realize such implications and exercise more discretion on a larger picture with regards to both fiscal and monetary policy. Fig 17. BOT assets Fig 18. BOT liabilities, equity
ASEAN has gained more importance role in the world economy with its size is slightly smaller than Indian economy, yet the region is full of diversity
AEC 2015 or greater economic integration within ASEAN is seen to apply more to Myanmar and Indochina, yet it is unlikely that these countries are ready to open for free trade by that time as they need to protect their agricultural sector
Most countries’ major export market is within ASEAN, except for Thailand that we relies a lot more on the EU market, which is seen vulnerable to financial turmoil
Thai exporters are seen to benefit more from diversifying their markets toward more ASEAN as we gain trade surplus from most countries in this region
Economic integration in this region is seen to mutually benefit each other while international trade enhances specialization and economies of scales; however, we also tend to see each other as core competitors
Diversity in Unity ASEAN consists of 10 nations, including Brunei (BN), Cambodia (KH), Indonesia (ID), Laos (LA), Malaysia (MY), Myanmar (MM), Philippines (PH), Singapore (SG), Thailand (TH) and Vietnam (VN). ASEAN has gained more importance role in the world economy. ASEAN economy is slightly smaller than Indian economy, which constituted about 3% of the global economy. The region here is full of diversity. Indonesia is the biggest economy in this region followed by Thailand and Singapore, while Laos is the smallest economy. In terms of population, Indonesia also ranks the first, followed by the Philippines and Vietnam, while Brunei is the smallest nation. In terms of development, Singapore is the only country here that is categorized as a developed country, while Myanmar, Cambodia and Laos still suffer from poverty and malnutrition. How can these diversified economies move forward together? This will be a challenging question for the years to come. Diversity in Unity or the concept of oneness among different socio-economic groups has not yet been tested whether it could work in this region. Despite uncertainty ahead, Thailand is likely to benefit from greater economic integration under higher possibility of economic and financial turmoil in 2012, largely owing to uncertainty in the eurozone debt crisis. Don’t wait for AEC 2015 There have been more and more people talking about ASEAN Economic Community or AEC 2015, which is basically a greater integration among ASEAN in terms of free trade barriers, free movement of professionals and capital. Actually, tariffs among core ASEAN-5, namely Thailand, Singapore, Malaysia, Philippines and Indonesia are not significant, while we also have Free Trade Agreements (FTA) with other countries. AEC 2015 is seen to apply more to Myanmar and Indochina, yet it is unlikely that these countries are ready to open for free trade by that time as they need to develop more infrastructure and system to protect their agricultural sector.
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Fig 19. World economy and the importance of ASEAN Fig 20. Shares of ASEAN economies
US22%
China10%
Other31%
UK4%
Russia3% Italy
3%
Germany5%France
4%Brazil4%
India3%
ASEAN3% Japan
8%
ID39.5%
LA0.4%MY
11.7%MM
2.4%
PH10.2%
SG12.6%
TH16.1%
VN5.8%
BN0.7% KH
0.6%
Source: IMF, KBank Source: IMF, KBank
Based on trade statistics below, using data of the first 9 months of 2011, we can see that Singapore exported the most, followed by Malaysia and Thailand. Most countries’ major export market is within ASEAN, except for Thailand that we relies a lot more on the European Union (EU) market. Apart from ASEAN and EU, other major trading partners of ASEAN are Japan, China and the US. Since the economies in the EU and the US are full of uncertainty due to debt crisis and banking problems, Thai exporters are seen to benefit more from diversifying their markets toward more ASEAN. Among ASEAN, there are only Thailand and Singapore that gained trade surplus with other countries within ASEAN. This shows that we have competitiveness that we could explore more so as to gain greater benefits from joining this economic community. Fig 21. Shares of ASEAN population Fig 22. ASEAN major export markets
Thailand and ASEAN: friend or foe? Trade statistics revealed that Thailand gained significant trade surplus with ASEAN, which is seen to benefit Thai exporters if we could explore more of these markets that we have competitiveness. In particular, even though our exports to Cambodia, Laos, Myanmar and Vietnam (CLMV) are insignificant, we gained large trade surplus to most of these countries, except for small deficit to Myanmar. Thailand lies in the strategic location that our exporters could access to markets in CLMV. Therefore, it is important that we could act now so as to capture market shares of products in these countries before other ASEAN members seize this opportunity. Economic integration in this region is seen to mutually benefit each other while international trade enhances specialization and economies of scales, leading to greater productivity and economic growth. However, in some cases we tend to see each other as core competitors as we all lie in the same geography and produce similar products. In addition, our major export markets are alike, i.e. China, Japan, the US and the EU. We also compete for direct foreign investment. We even compromise our tax policy to provide more incentives to foreigners more than to local producers through the Board of Investment (BOI). How about the role of China in this region? We often see China as the end of vertical integration in Asia where ASEAN exports raw materials and intermediate products to China. China uses its cheap labor to assemble and produce final products, and then exports to Japan, the US, the EU and back to ASEAN. China is not seen as a direct competitor to ASEAN. What about the prospects of economic turmoil in advanced countries this year? If the markets in the US, the EU and Japan are in trouble, exports from China are likely to decline, which is seen to unavoidably affect exports from ASEAN to China. Therefore, we cannot simply diversify our exports from the advanced markets to China since China is likely to receive negative impact from economic turmoil as well. In such circumstance, increasing trade transactions within ASEAN is likely to mitigate the adverse effects of economic slowdown caused by debt crisis in the eurozone. The next question is what we should be trading within this region during the period of crisis. We would like to invite the audience to follow us in the next episode of this topic in the future. Fig 25. Thailand major trading partners
Fig 26. Thailand trade balance with major trading partners
Bond market in 2011 saw a lower trading volume compared to 2010 due to the increase in uncertainties in the global financial markets
Long-term yields saw lesser change compared to the front-end despite of a 125bp increase in policy rate - helped borrowers to maintain relatively low funding cost but this could be different this year on uncertain bond demand
We continue to expect a 25bp in the next MPC meeting in January while BoT’s latest outlook on 2011 economic growth also suggests that further easing is possible
Bond market in the year 2011 – a quick wrap up Outright trading volume last year was smaller than that of the year 2010. This was partly due to the increase in uncertainties in the global financial markets, making it more difficult for investors to gauge market timing and trends. Thai government bonds (LBs) trade volume averaged at THB379bn per quarter in the year 2011, a 13.4% decline from the year 2010 which saw an average trade volume of THB438bn per quarter. Meanwhile, total trading volume for the Bank of Thailand bills (or CBs) continued to maintain a high volume compared to other types of bonds - average share of total trade is 84%. Share of corporate bonds and state enterprise (SOE) bonds trade remained low at only 1.1% and 0.2% of total trade, respectively. Government bonds share amounted to about 8.6% in 2011, a significant decline from 2010’s share of 11.2%. Bond yields in the first half of 2011 were on an upward moving trend, in line with the pick up in inflation rate and the policy rate. Yet, long-term yields saw lesser change compared to the front-end: 2-year yield increased by 86bp whereas 10-year yield rose only 14bp during the first half. The policy rate saw a 1.00% increase during the same period. Such trends helped the government and the corporate sector to maintain relatively low costs of borrowing. For the second half of the year, bond yields started to see declines, although there were sell-offs in certain periods due to global market’s risk-off sentiment. In general, the local market indicated that investors had begun to price in global and local economic slowdown, as well as the earlier-than-expected policy rate cut by the Bank of Thailand in the aftermath of the floods. 2-year yield ended the year at 3.11%, way below the policy rate while the 5- and 10-year yields were at 3.16% and 3.35%, respectively. Fig 27. Government bond yields Fig 28. Bond trade volume per quarter (exclude <1YR)
Going forward, the bond market should be supported by policy rate downtrend (although we expect only another 25bp cut for Thailand, monetary easing remains the theme in Asia) as well as a slowdown in price increase. However, there are also several negative factors which include high level of borrowing needs by the government in 2012-2013 to fuel a quick economic recovery as well as to equip the country with better water management systems to avoid another 2011-style flooding. Furthermore, foreign investors’ demand for Thai bonds this year could be less robust compared to the 2010 – 2011 period. All the factors would make demand for fixed income investment rather unpredictable in the quarters ahead. Uncertain bond demand and growth in mutual funds NAV Over the past few years, the growth of mutual funds or unit trusts had been robust, or at least, the annual growth of the net asset value (NAV) in the past had usually been double-digit high. While the year 2010 was a good year for both stocks and emerging market bonds, the year 2011 saw a topsy-turvy trading ground. We note that the NAV of mutual funds saw an average growth of 11.1% during the past 5 years, including 2011 (data as of October 2011), which is much lower than the 28% average growth achieved during the previous 5 years (2002-2006). In particular, NAV fell 2% from the end of 2010 to October 2011. The decline reflected the market-to-market effect of fixed income securities when yields rose as well as the decline in equity value (SET Index fell 0.72%yoy in 2011). We also suspect that fresh investment into the mutual funds could be less robust than the previous two years when the stock market was in recovery mode.
Fig 29. Growth of mutual funds Fig 30. Size of mutual funds, life policy reserves, and
bank deposits compared to GDP
0
500
1,000
1,500
2,000
2,500
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-10010203040506070
Net asset value (left ax is :Bt bn) Growth (right axis : % )
Mutual fund Life Policy Reserves Bank Deposits (right axis)
% Domestic savings in various forms as share of GDP %
Source: AIMC, KBank Source: AIMC
In particular, the investors’ eagerness in fixed income funds could be much more subdued due to small difference of returns from term deposits and bond yields. While fixed income funds continue to have the largest share (62% in 2010) among all of the fund types, its growth has been less significant compared to the other types of funds, namely equity funds, mixed funds, and property funds.
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Fig 31. Mutual funds NAV classified by underlying assets
Fig 32. Growth of mutual fund NAV classified by underlying assets
Mixed Fund3%
Property Fund (Type1)
4%
Resolving Financial
Institution Fund8%
Others2%
Fixed Income Fund62%
Equity Fund21%
-40-20
020406080
100120140
2006 2007 2008 2009 2010
Equity FundFixed Income FundMixed FundProperty Fund (Type1)
Source: AIMC, KBank Source: AIMC
However, we continue to see support coming from the shifting of traditional saving methods (saving accounts and term deposits) into mutual funds, although this trend may not prove to be robust in 2012 due to several macroeconomic factors, in particular growth of the value of fixed income and equity investments due to global economic slowdown. The rather “stable” net-buying volume by mutual funds in the bond market in 2011 may also be suggesting such uncertainties. In addition, we have been seeing a less robust foreign participation in the bond market, despite that their net-holding had increased to about 11% in 2011 Fig 33. Local mutual funds net-buying volume (monthly) Fig 34. Foreign investors’ net-buying volume (monthly)
474
383 357
455 482 479532 511
444 445
334
448505
433471 445
0
100
200
300
400
500
600
Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Fig 35. Holders of government bonds (as share of total)
0%
20%
40%
60%
80%
100%
2004 2005 2006 2007 2008 2009 2010 2011Nov
No nresidents
Ho useho lds & No npro fitInstitutio n Serving Ho useho ld
P ublic No n-FinancialCo rpo ratio ns
No n-Financial Co rpo ratio ns
Lo cal Go vernment
Central Go vernment
Other financial institutio ns
Other Depo sito ry Co rps(banks)
Central B ank
Source: BoT, KBank
Outlook for monetary policy We continue to expect a further 25bp cut on the next monetary policy meeting on January 25th, bringing the policy rate to 3.00%. On the 9th January 2012, director of the Office of Macroeconomics at the BoT, Dr. Songtham Pinto, said that the central bank would probably revise down its economic growth forecast for the year 2011 to reflect a deeper impact from the floods in Q4. BoT had estimated that the economy would grow by 1.8% yoy. This outlook is in support of further monetary easing, especially as risks to inflation remain low in the near term. We also note that there is an ongoing risk to global economic growth coming from the European debt crisis. In any case, the MPC seemed to be split about more or less easing during the past few meetings. Similarly, there seems to be differences in the bond market with regards to the extent of easing needed as well. This could make the down trend of the front-end of the yield curve more sticky than usual. As for inflationary pressure, we see risks of it returning but for the near term, such risks are limited. While global economic undergoes a slowdown, we expect that commodity prices would stablize somewhat or see a downward trend. However, there are also other local factors to consider, namely the adjustment of minimum wages (in April for Bangkok and nearby provinces) and energy prices. With regards to the energy prices, there is a pent up pressure on prices due to long-term government subsidies. The cabinet recently passed a resolution for the natural gas (NGV) price to go up to 14.50 baht from 8.50 baht at the rate of 50 satang per month (Jan 16th – Dec). We will continue on the details of bond supply in the next section.
Bond Supply in FY2012
Total government financing for FY2012 would be THB740bn in
which the current detail showed THB525bn would be government bond supply (LB)
THB350bn for long-term flood-prevention infrastructure under the emergency decree would not affect government bond supply
Initially, Q2 FY2012 government bond supply would be THB108bn but the delay of THB8bn FRB makes the supply to THB100bn
THB393bn of bond issuance remained for the second-half of FY2012 or an average as high as THB196.5 per quarter (not yet considering the possibility of THB53.5bn in Q2)
Government financing for FY2012 and bond supply in Q2 FY2012 Total government financing need for FY2012 would be THB740bn. This came from THB400bn in planned government budget and THB340bn in FIDF debt restructuring under the Public Debt Management Act (THB107bn for FIDF1 roll-over and THB233bn for FIDF3 roll-over). Previously, the planned budget deficit was THB350bn then revised upward in late October 2011 to THB400bn due to severe flooding situation in Thailand. In addition, there might be another THB149bn of financing to prepay some of the existing bank loan from TKK fiscal stimulus program from 2009-2010. There would be THB350bn for long-term flood-prevention infrastructure and water management system under the emergency decree which the Cabinet agreed in principle early January. However, Public Debt Management Office (PDMO) mentioned on Jan 9th that this amount would likely be financed with bank loans and promissory notes rather than government bonds. Out of the total financing requirement of THB740bn in FY2012, government bond (LB) supply would total about THB525bn (number subject to changes by PDMO in February). In the first quarter of FY2012 (Sep - Dec 2011), THB32bn bond was issued for the FIDF debt portion. The small issuance had been because the government’s budget had to go through a few more parliamentary processes before becoming law, and hence borrowing for the budget deficit portion is not possible yet. In the second quarter of FY2012 (Jan – Mar 2012), PDMO first announced altogether THB108bn of bond issuance – THB49bn in January, THB15bn in February and THB44bn in March. However, PDMO said on Jan 9th that THB8bn in floating-rate bond (FRB) which was planned on Jan 11’s auction would be delayed as it awaits more clarity with regards to the FIDF debt transfer under an emergency decree. This THB8bn FRB was initially for FIDF bond that will be matured this year. Hence, total issuance has been reduced to THB100bn. Noted that there would be changes on Q2 issuance after the FY2012 Budget Bill comes into effect and this is likely to be around early February 2012. The PDMO said that it plans to issue an additional THB53.5bn of government bonds (includes LB155A, LB21DA, LB27DA, LB416A and LB616A). This is for the budget deficit portion.
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Fig 36. Government Bond issuance schedule in 2Q of FY2012 (Jan-Mar 2012) Issuance
Date LB176A LB193A ILB217A LB326A LB616A LB165A (FRB)
Total (billion baht)
11 Jan 5 5 18 Jan 16 16 25 Jan 11 9 20
Total for January 41 15 Feb 15 15
Total of February 15 14 Mar 12 7 19 21 Mar 28 Mar 15 10 25
Combining bond supply of the first and the second quarters, the size is THB132bn (THB32bn + THB100bn). Therefore, the remaining amount of government bond issuance in the second half of FY2012 is THB393bn (an average of THB196.5bn for each quarter). Even though 2012 Budget Bill becomes effective in February 2012 and THB53.5bn will be issued, the remaining amount of government bond issuance in the second half of FY2012 would still be high at THB339.5 (an average of THB169.75bn for each quarter). In FY2011, government bond issuance averaged at THB118bn per quarter. This was due to the fact that bond issuance in the first quarter of FY2012 was quite low comparing to the previous year as 2012 Budget Bill had not yet been approved at that time due to the new government was formed around August 2011. Fig 37. Bond issuance plan for FY 2012 (unit: billion baht)
Benchmark bonds (LBs) Auction frequency Month no. Per auction
Total LBs 510* 32 100 378 Source: PDMO. *Noted that the data in the table is based on the previous release of THB510bn of LBs issuance as there is no detail about THB525bn LBs issuance yet Theoretically, large supply will increase bond yield, given the equivalent level of demand. However, in this case of large bond supply, it is uncertain that there will be enough demand of this size of bond issuance in the third and the fourth quarters. Therefore, there is a potential that the yield might adjust upward. With high interest rate when government borrows at the large amount, private sector might reduce their borrowings (crowding-out
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25
effect) given the assumption that the government borrowing is used in such a way that it does not stimulate the demand for the private sector to invest. If government borrowing is used for the investment in infrastructure, it may stimulate the demand for the private sector to borrow for their investment and expansion (crowding-in effect). Fig 38. Government Financing plan for FY2012 Unit : in billions of baht
(4Y and above) 31.0 50.7 61.2 54.0 125.1Restructuring (12 and above) - - - 34.6 45.0
Net bank loans 0.0 30.0 177.8 -58.7 -149.12-4Y - 30.0 260.0 58.9 -Restructuring (prepayment of bank loans) - - -82.2 -117.6 -149.1
Others - - - - 49.1 Source: PDMO, KBank
* Noted that the data in the table is based on the previous release of THB510bn of LBs issuance as there is no detail about THB525bn LBs issuance yet From FY2008 to the current fiscal year, the average auction size has been increasing substantially and the auction amount for the benchmark bond has been gradually increasing over time. Inflation-linked bond and amortized bond in FY2012 The current announced size for inflation-linked bonds (ILB) is THB60bn for FY2012. However, Mr. Chakkrit Parapuntakul, PDMO’s Director – General, said on 27 September 2011 that PDMO might consider revising the size of the ILB downward in FY2012 as concern over the inflation has been reduced. December inflation was easing with the headline CPI at 3.53% and the core CPI at 2.66%. Headline CPI was 3.81% and core CPI was 2.36% in 2011 while Ministry of Commerce forecasted headline CPI in 2012 to be in the range of 3.3% - 3.8%.
If ILB size has been reduced, PDMO might consider issuing amortized bond (which is the bond that gradually pay the principal amount over time) in FY2012. Primary bond size for both ILB and amortized bond altogether will be THB90bn. Public debt management amount in FY2012 In November 2011, public debt management amount was increased by THB363.96bn to THB1.65trn which was an increase in THB269.16bn in new debt issuance and THB94.80bn in debt restructuring portion. Fig 41. Summary Table for public debt management amount for FY2012 (in million baht)
Domestic ForeignI. New Debt Plan 469,166.76 703,626.76 34,700.00 738,326.76 269,160.00 1. Government 396,372.06 365,372.06 31,000.00 396,372.06 - 2. State Enterprise 72,794.70 338,254.70 3,700.00 341,954.70 II. Debt Restructuring Plan 640,837.84 735,638.64 - 735,638.64 94,800.80 1. Government 520,122.45 614,923.25 - 614,923.25 2. State Enterprise 120,715.39 120,715.39 - 120,715.39 - III. Risk Management Plan 177,000.00 177,000.00 - Total I + II + III 1,287,004.60 1,650,965.40 363,960.80 1,650,965.40
177,000.00
Previous amountPlan ChangeTotalAdjusted amount
269,160.00
94,800.80
Source: Ministry of Finance
Bank for Agriculture and Agricultural Co-operatives (BAAC) requested THB296.16bn increase in its new debt plan under the state enterprise entity for using in the rice-pledging scheme. This amount would be guaranteed by the Ministry of Finance. Therefore, this portion would not affect the government bond issuance in 2012. THB94.80bn debt restructuring part was a combination of a decrease of THB54.3 in T-Bill roll-over and an increase of THB149.1bn in term loan for economic rehabilitation and improvement. This again would not affect government bond supply for 2012. BOT bond in 2012 BOT mentioned that it would continue to aim at regular issuance across the short to medium-term maturities throughout the year in its plan for 2012 BOT bonds issuance. In this year, there is a change in the auction schedule. The auctions for the two-year and three-year fixed coupon BOT bonds will be on Thursday instead of Tuesday in order to avoid such bonds to mature on Saturday and Sunday. The auction schedule for the other
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types and maturities of BOT bonds will remain the same. In addition, the number of issues of BOT bonds in 2012 will be reduced while the outstanding amount per issue will be increased. This will help increase the liquidity of BOT bonds trading in the secondary market. Initially, BOT will increase the issue size per auction of bond maturing from one year onwards and re-open the same issue a few times such that the outstanding per issue will be more than THB80bn. Fig 42. BOT Auction Schedule in 2012
Type of Bond Auction Day Auction FrequencyIssue Size per auction
(billion baht)
Outstanding per issue
(billion baht)
Number of Issue per year
Discount Bondless than 15 day THU and/or FRI every week 60-100 60-100 52-781-month, 3-month, 6-month TUE every week 15-22 15-22 521-year TUE every month 30-50 80-120 4Fixed-coupon Bond2-year every even month3-year every odd month4-year TUE every quarter 20-40 80-120 1Floating-rate Bond2-year FRI every odd month3-year FRI every even month
2
1
30-50
10-15
80-120
60-90
THUTHU
Source: BOT
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Economic Update
Most key economic indicators for Nov-11 headed south. Exports reported the biggest over-year contraction in more than
two years, in line with supply-chain disruptions caused by flooding that inhibited manufacturing output.
The trade surplus narrowed, while the current account went into the red.
Tourism reached the lowest level in 17 months. Although business sentiment began to improve, private investment
and consumption actually shrank. The Headline CPI eased in Dec-11, suggesting that the peak of this
inflation cycle has already passed. Due to post-flood renovation efforts, plus governmental economic
stimuli, the Thai economy could experience a V-shaped recovery, after bottoming out in 4Q11. However, risks loom large, particularly with the EU debt crisis, which leads us to maintain a close to 40% probability for an out-of-control Eurozone economic scenario.
Nov-11 exports registered the biggest contraction in over two years Despite a smaller MoM contraction, exports during Nov-11 saw a deepening contraction YoY, reaching (-) 13.1% − the worst in 27 months − from the (-) 0.1% drop YoY shown in Oct-11, which mirrored a lingering negative impact from the severe flooding nationwide. This pulled the export value down to $15.3 billion, from the 17.0 billion in Oct-11. Exports, excluding gold, also plummeted into the red at (-) 12.9% YoY in Nov-11, compared to the 2.9% growth YoY in Oct-11. As expected, these export contractions were largely attributable to shrinking export volume (falling 15.2% YoY, versus the (-) 3.7% contraction in Oct-11), in tandem with production disruptions and logistical problems due to flooding; meanwhile, export prices also cooled slightly (2.5% growth YoY, compared to the 3.6% in Oct-11). Fig 1. Nov-11 exports recorded the biggest YoY drop in over two years
Fig 2. Export volume led the overall decline
0
5,000
10,000
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May -10 Aug-10 Nov -10 Feb-11 May -11 Aug-11 Nov -11
Expo
rt Va
lue (U
SD M
illion
)
-20%-10%0%10%20%30%40%50%60%
% Y
oY
Ex ports Ex ports (ex cluding gold)% YoY for Ex ports % YoY for Ex ports ex clud. Gold
Classified by product category, we now see that major hi-tech products were among the worst performers, as their production sites were mainly located in flooded industrial estates. Those most affected included vehicles, parts and accessories (dropping (-) 62.4% YoY, compared to a (-) 16.5% contraction YoY in Oct-11), computers and parts (falling (-) 62.2% YoY, against the (-) 21.2% contraction YoY in Oct-11), electrical appliances (dropping (-) 43.0% YoY, compared to the (-) 43.5% decrease YoY in Oct-11), as well as IC and parts (retreating (-) 33.3% YoY, versus the (-) 16.8% drop YoY in Oct-11). As for agricultural products, rice exports plunged in Nov-11 (contracting (-) 21.2% YoY, compared to the (-) 4.7% contraction YoY in Oct-11), as one export rival, India, reentered into the global market with highly competitive pricing. Rubber exports were also down (reporting 24.1% growth YoY, worsening from the 59.8% growth YoY in Oct-11), in light of fewer orders from China. In the same direction, exports to key trade partners (except those in ASEAN and India) experienced sharp contractions in shipments during Nov-11, over-year.
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Fig 3. Hi-tech products were among the worst performers
Fig 4. Exports to most major trade partners plummeted sharply, due to flooding nationwide
(100)
(50)
0
50
100
150
Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11
% Y
oY
Vehicles & Parts Computer & Parts Electrical Appliances
Rice IC and Parts Rubber
(40)
(20)
0
20
40
60
80
U.S. China Japan EU (15) ASEAN (9) India Middle East
Nov-11 imports retreated sharply from 20.6% growth YoY in Oct-11 to a (-) 1.9% contraction YoY, which was the first drop since Oct-09. Imports of raw materials and intermediate goods, as well as vehicles and parts, led the overall decline, mirroring \ production shortfalls during the flooding. Meanwhile, imports of crude oil also contracted YoY, due to a high base of comparison from 2010. Excluding gold, adjusted imports had contracted (-) 5.7% YoY, versus the 8.7% growth YoY seen in Oct-11. Fig 5. Imports were also pulled into the red, in tandem with exports
Fig 6. The current account went into deficit during Nov-11
Due to the sharp deterioration in exports, the Nov-11 trade balance recorded a lower surplus of $218 million, compared to the $1.01 billion in Oct-11. Although the net services, primary and secondary income reported some MoM improvements via smaller deficits following compensation by foreign insurance firms and/or reinsurers to flood-affected customers, the current account went (-) $136 million into deficit, from the $39 million surplus in Oct-11. Tourism was dragged down to the lowest level in 17 months Despite being the tourism high-season, floodwaters that had crept into inner Bangkok during Nov-11 – caused many foreign tourists to cancel trips to Thailand. As a result, the number of foreign tourist arrivals dropped from 1.41 million in Oct-11 to 1.21 million in Nov-11, which was a 17-month low. Similarly, it shrank (-) 17.9% YoY, down significantly from the 7.0% growth YoY in Oct-11. Seasonally-adjusted growth was down even more, reaching a (-) 21.3% contraction YoY, from the (-) 11.9% drop in Oct-11.
The hotel occupancy rate for Nov-11 edged downward to 56.2%, versus the 58.5% in Oct-11, with occupancy rates in the central and southern regions leading the decline amid severe flooding there. Fig 7. Foreign tourist arrivals reached a 17-month low Fig 8. Hotel take-up rates were pulled down,
Manufacturing production reported a deepening contraction YoY In Nov-11, the Manufacturing Production Index (MPI) reported a deeper (-) 48.6% contraction YoY, versus the (-) 30.1% drop in Oct-11, as major industrial estates continued to suffer from severe flooding. This large over-year contractions in manufacturing production were seen as broad-based across key categories, led by the MPI for export-oriented products (contracting 63.3% YoY, compared to the 31.7% drop in Oct-11) that suffered production shortfalls in shoes, machinery, office appliances, electronic tubes, and some electrical appliances. Additionally, the MPI for products serving both domestic and international consumption also staged a deeper over-year contraction (reaching 62.1% drop YoY, compared to the 51.0% decrease in Oct-11), due mainly to a massive drop in automotive production. Meanwhile, the MPI for domestic consumption-oriented products was (-) 11.4% YoY, versus Oct-11’s (-) 15.0% YoY, although part of this production shortfall was due to a routine refinery plant maintenance shutdown. Fig 9. Nov-11 manufacturing production saw deepening over-year contraction
Fig 10. The MPI for export-oriented products and goods serving both domestic and international consumption led the overall decline
-60
-50
-40
-30
-20
-10
0
10
Nov-10 Feb-11 May-11 Aug-11 Nov-11
% Y
oY of
MPI
40
45
50
55
60
65
70
% C
apac
ity U
tilizati
on R
ate
% Capacity Utilization (rhs) MPI (lhs)
-70-60-50-40-30-20-10
010203040
Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11
% Y
oY of
MPI
exports < 30% 30% < exports < 60% exports > 60%
Sources: OIE, KResearch Sources: OIE, KResearch
Consistent with the cooling MPI direction, the OIE’s capacity utilization rate for Nov-11 plummeted for a second consecutive month, reaching 40.1% from the 46.4% in Oct-11.
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Business sentiment began to improve after the flooding eased After having been hit hard by anxiety toward the flooding in the past month, private sector confidence began to show some improvement, albeit not yet broad-based. The Nov-11 Business Sentiment Index (BSI) for the current situation rose from the lowest level in 35 months of 36.7 in Oct-11 to 39.0, while the BSI assessing sentiment three months forward surpassed the 50-level threshold to reach 54.4, from the 42.9 previously. As the worst of the flooding had already passed prior to the survey period, businesses were expected to be looking at investments for capital asset acquisitions and machinery overhauls, as well as that needed for resumed production, which helps brighten the BSI outlook somewhat in the near-term. Nevertheless, the Consumer Confidence Index (CCI) and the Thai Industries Sentiment Index (TISI) for Nov-11 continued to sustain losses. Fig 11. Business sentiment began to improve Fig 12. Yet, actual private consumption and investment
deteriorated further
35
40
45
50
55
60
May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11
BSI
60
70
80
90
100
110
120CCI & TISI
BSI BSI (Expected for the next 3 mths) CCI TISI
-120
-80-40
0
4080
VAT Passengercar sales
Motorcyclesales
Imports ofconsumer
goods (1995price)
Imports ofcapital goods(1995 price)
Commercialcar sales
Cement sales
%YoY
1Q11 2Q11 3Q11 Oct-11 Nov-11
Sources: BOT, UTCC, FTI, KResearch
Private consumption and investment contracted Despite an improvement in the BSI, the Nov-11 Private Investment Index (PII) decelerated, recording a (-) 1.3% contraction YoY − the first since Dec-09 − compared to the 5.6% growth YoY in Oct-11. Broad-based declines were seen in the sales of cement, commercial vehicles, and imports of capital goods. The Private Consumption Index (PCI) also retreated, reaching a 1.6% contraction YoY, versus the 2.3% growth achieved in Oct-11. With the exception of real imports of consumer goods, other PCI components went deeper into the red. Losses were also seen in real VAT collections, as well as sales of passenger cars and motorcycles. The Dec-11 Headline CPI softened, suggesting that the peak in inflation is behind us After months of accelerating prices, the Dec-11 Headline CPI eased 0.48% MoM, which was the biggest MoM drop in around three years, and being the result of decreases in prices for fresh poultry, eggs, fruit and vegetables (due to subsiding floodwaters), plus falling retail fuel prices (in light of cooling global oil prices). This brought down the over-year change in the Headline CPI to 3.53%, from 4.19% YoY in Nov-11, and thus indicating that the country’s inflation rate had peaked out. The same direction was also witnessed with the Core CPI (excluding prices of fresh foods and energy) that fell to 2.66% YoY, from the 2.90% YoY in Nov-11.
* Forecast as of November 21, 2011 Sources: MOC, KResearch Sources: KResearch
4Q11 GDP could contract as much as 3.3% YoY The disappointing performance seen in Oct-11 and Nov-11’s key economic figures suggests the possibility that the 4Q11 GDP could contract as much as 3.3% YoY (in our base case scenario), down significantly from the 3.5% growth YoY achieved in 3Q11. This leads us to affirm our full-year growth projection at 1.5% growth YoY. Dragon Year: Uptrends expected in GDP, but risks loom large Looking into 2012, we believe that post-flood renovation work, as well as governmental economic stimuli and a postponed BOT monetary policy tightening should help boost the economy domestically. As a result of those factors, plus a base effect, the Thai economy could experience a V-shaped recovery after bottoming out in 4Q11. As such, full-year growth is anticipated to achieve 4.3% (as seen in our base case), or be within in a range of 3.5-4.8%, against the 1.5% growth expected overall for 2011. However, risks to economic growth loom large, particularly with the EU debt crisis, which remains far being resolved. At this stage, we maintain our belief that there is a close to 40% probability for an out-of-control Eurozone economic scenario, resulting from their debt crisis, which would likely force our 2012 GDP growth down to just 1.0% YoY. Other notable risks include geopolitical tensions between Iran and the west that could trigger another spike in global oil prices, as well as the U.S. presidential election late in the year that could affect directions of their economic policies, and thus, growth momentum, both before and after their elections. On inflation front, the deceleration seen in Dec-11 inflation should continue into early 2012, wherein the 1Q12 Headline CPI may average 3.5 percent YoY, which would be relatively low compared to the average of 4.0 percent recorded during 2Q11 to 4Q11. This would be attributable to stabilizing goods prices after spikes during the flooding. However, inflation in coming months may continue to be bloated by factors affecting prices over-month, including steep wage increases by the private sector, the government’s new energy price structure resulting in price hikes on certain fuels, plus rising farm produce prices and lofty global oil prices driven most recently by strained relations between Iran and the West. With some pass-through effect, the Core CPI will likely edge upward, approaching the upper-end of the BOT’s current Inflation Targeting range of 0.5-3.0% during the latter months of 2012.
The Outlook for Next Month Due to subsiding floodwaters, Dec-11 economic figures should show some gradual MoM improvement. That would include exports, which would result in a smaller over-year contraction in Dec-11 (compared to the (-) 13.1% drop YoY in Nov-11). Some improvement in the Dec-11 MPI is also expected, although a double-digit contraction remains possible, due to a base effect and the fact that production output levels remain far from pre-flood normality. As for the Headline CPI for Jan-12, higher global oil prices – spiking on global tensions – could pressure inflation, forcing it upward MoM. However, a base effect will likely tame its over-year change, keeping it lower than the 3.53% YoY achieved in Dec-11. The Core CPI for Jan-11, meanwhile, will likely hover close to 2.68% YoY seen in Dec-11, allowing the BOT to keep their key policy rate at a favorable level to support the economic revival at least in the near-term.
► Despite improving US economic data shoring up global equity markets in the past 2 weeks, we are concerned that the current optimism would not last long as the EU debt situation may soon hit a liquidity crunch, given a large amount worth Euro225bn of bonds to be raised in 1Q12. We believe the risk-reward profile remains unfavorable and maintain our recommendation of selling into strength.
► Although the market was buoyed by the European central bank (ECB) providing a huge amount of liquidity to its banks, the latter appear only to use the funds to refinance borrowings and not to expand their balance sheets. With needs for additional capital requirement to meet the new BIS standard, credit crunch is another real possibility, suppressing global growth outlook further.
► We foresee 2 scenarios for the SET Index in early 2012, depending on how the EU debt crisis plays out. In the case of a normal correction (EU situation remains status quo), we believe the SET at 900 point would be attractive enough to encourage local investors to enter. In the case the EU debt situation worsens than what the market expects, we see the SET Index testing price-to-book (P/BV) level at 1.5x, implying the SET at 812 points.
► We upgrade our rating on Utilities to "Overweight" from "Neutral" as we prefer sectors with high earnings visibility amidst the global turbulence. We also maintain our “Overweight” ratings on Food & Agri, Contractors, Commerce, Healthcare and Media. However, we downgrade Tourism and Property to "Underweight". Our top picks are PTT, KTB, CPF, GLOW, STEC, AP, MAKRO, MAJOR and BH.
► In anticipation of market volatility in 1Q12, we recommend active investors focus on high-yield stocks such as CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW and BAFS. Other stocks with positive investment themes (and some with speculative appeals) are ITD, SIRI, THCOM, HEMRAJ, KK, KSL and LOXLEY.
What still worries us in 1H12 We are worried -- make that very worried -- about the first half of 2012 because the global economic picture looks very unfriendly to financial markets, particularly during the early part of the year.
World economic growth Consensus projects that the U.S. economy will grow 1.90% and 2.05% in the first and second quarters of 2012. That's a long way from a recession. Looking back at the past six months, such consensus estimates were consistently revised down. The optimism associated during the start of the year generally gives way towards pessimism as the year wears on (Figures 1-4). Besides the U.S., the direction of Chinese economic trends isn't comforting. Consensus calls for Chinese economy growth to slow from an annual rate of 9.1% in the third quarter of 2011 to 8.60% in the fourth quarter of 2011 and 8.10% in the first quarter of 2012. Consensus has cut its forecast for 2012 growth to 8.1% from 8.4% in the last three months. Even in the Eurozone, the origin of the current global malaise, consensus forecasts calls for economic contraction of 0.10% during the first quarter and second quarter of 2012. This can be called a mild recession given the scale of the current debt problems. Not the best of times, certainly, but not exactly a replay of 2008, either. So why are we worried? Although history shows that the correlation between the magnitude of economic growth and stock prices changes is not all that strong, changes in direction and the acceleration (deceleration) of growth are strongly correlated to stock prices. In this respect, 1Q12 looks a worrisome period. Thailand’s 1Q12 growth itself will look poor on YoY basis as the country recovers from floods. Fig 1. US GDP consensus growth forecast Fig 2. EU GDP consensus growth forecast
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E
US (Dec)
US (Nov)
US (Sep)
US GDPGDP growth (%)
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E
EU (Dec)
EU (Nov)
EU (Sep)
EU GDPGDP growth (%)
Source: Bloomberg, KS Source: Bloomberg, KS
Fig 3. China GDP consensus growth forecast Fig 4. China CPI consensus forecast
8.0
8.2
8.4
8.6
8.8
9.0
9.2
9.4
9.6
2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E
China (Dec)
China (Nov)
China GDPGDP growth (%)
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E
China (Dec)
China (Nov)
China CPICPI(% YoY)
Source: Bloomberg, KS Source: Bloomberg, KS
3838
38
Thank Europe for the doubts The uncertainty in forecasts for China, the U.S. and the global economy as a whole largely stems from uncertainty over the depth of the slowdown in the Eurozone. On 8 December, the ECB highlighted a high level of uncertainty in its growth forecast for 2012, indicating growth between +1% (weak) to -0.4% (mild recession). Previously, it projected 2012 growth between 2.2% and 0.4%. Based on the numbers, you could argue that the degree of uncertainty is lower in the latest call -- the difference between the high and low of the forecasts has shrunk to a 1.4 point spread from the prior 1.8 point spread. But we think that the uncertainty has actually increased since the difference between the high and low forecasts is now the difference between mild growth and a mild recession instead of between solid growth and mild growth. In addition, the recently announced grand plan to save the euro (Is it the Grand Plan No. 3 or No. 4? I've lost count) concentrates the risk in the first half of 2012. Even if we take the European leaders' timetable as accurate, the permanent European Stabilization Mechanism (ESM), with its 500 billion Euros in bailout funding, isn't set to go into operation until July. Nobody knows how long it will take the International Monetary Fund to get its promised 200 billion Euros in new funding into position and nobody knows exactly what the IMF will do with that funding in support of Eurozone governments. But what we do know is that the first quarter is loaded with funding needs. The Eurozone governments will need to sell Euro824bn debt in 2012 and Euro225bn of that will need to be raised in the first quarter of 2012. That's not the end of the Eurozone's calls on the financial markets, either. Agencies and supranational bodies such as the temporary European Financial Stability Facility (EFSF), the bailout fund that is selling bonds to support Greece, Ireland and Portugal, will have to issue Euro175bn of debt in the first quarter. At current levels of interest rates, the amount would not be an easy sell in early 2012? This is the main reason why we are cautious about early 2012. QE: ECB vs. FED Some of the ECB actions can be considered as quantitative easing (QE). In late December 2011, the ECB opened an unlimited 3-year loan window for European banks, charging only 1% as borrowing cost. Total of Euro489bn of funds were requested by banks and it is estimated two-thirds of the funds have been reserved to re-finance banks’ maturing bonds with the rest potentially to left for clients’ business. This low-cost money will not positively impact risky asset prices like the Fed's QE program. However, the injection of this money will be enough to provide liquidity to the European banking system and protect the market downside from failure of the banking system. Besides ECB’s efforts to protect the banking system, it is also hoped that financial institutions would use the funds to purchase sovereign bonds in the secondary market, which could lower yields and reduce borrowing costs for Euro countries. Although lower yields for Spain have been observed, only Italy’s short-term yields (less than 3 years) have been lowered.
3939
39
4040
40
While the Euro489bn cash injection has not fixed the system. To strengthen banks to meet the adequacy ratio target of 9%, the European Banking Authority (EBA) estimates that banks will need Euro115bn of capital. So there are two issues going on at the same time: liquidity and capital needs. It is better to adopt a conservative attitude towards the market presently. Fig 5. Italy bond yield after ECB’s loans Fig 6. Spain bond yield after ECB’s loans
2
3
4
5
6
7
8
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y
21-Dec-11 22-Dec-11 29-Dec-11
ITALY BOND YIELD
Yield (%)
1
2
3
4
5
6
7
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y
19-Dec-11 22-Dec-11 29-Dec-11
SPAIN BOND YIELD
Yield (%)
Source: Bloomberg, KS Source: Bloomberg, KS
Fig 7. 2012 Bond redemption of Italy & Spain Fig 8. Selected Euro Bond yields
2216
5344 45
158
2519 19
2718
3
12
9
15
9
23
9
7
24
8 7
28
3
2
0
10
20
30
40
50
60
70
80
Dec
-11
Jan-
12
Feb-
12
Mar
-12
Apr-
12
May
-12
Jun-
12
Jul-
12
Aug
-12
Sep-
12
Oct
-12
Nov
-12
Dec
12
SPAIN ITALY
EUR (bn)
0
5
10
15
20
25
30
35
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
GREECE
PORTUGAL
ITALY
IRELAND
SPAIN
HUNGARY
BELGIUM
FRANCE
GERMANY
10 Years bond yield (%)
Source: Bloomberg, KS Source: Bloomberg, KS
4141
41
Fig 9. Key events to monitor and their implications
Key date Events Implications
Jan 9, 12 German Chancellor Angela Merkel, French President Nicolas Sarkozy hold debt-crisis talks in Berlin
Jan 12, 12 ECB monthly meeting
(scheduled rate meeting on Feb 9, 12)
(+) Market expects further policy rate cut
Jan 23-24, 12 Euro-area and EU finance ministers meet in Brussels
Jan 24-25, 12 FOMC meeting (+) Market awaits new stimulus package (QE3)
Jan 25, 12 MPC meeting (+) Expect another 0.25% cut to 3.00%
Jan 25-29, 12 World Economic Forum
Jan 30, 12 European Union leaders meet in Brussels
Feb 2012 Italy and Spain debt deals (Italy redeems Euro46.5bn bonds between Feb 29 - March 1)
(-) Question of refinancing capability if no resolutions made yet
Feb 2012 Thai listed firms to release 4Q11 results (+/-) Mixed, positive and negative
March 1-2, 12 EU leaders meet in Brussels
March 20, 12 Greece redeems Euro14.4bn bonds (+/-) Neutral but could turn negative if Greece does not receive next round of aid from EU and IMF
March 2012 EU treaty amendment (-) Interim period of political unrests? Source: Bloomberg, BOT and KS
Warning signs One indicator of the level of fear is the total net-asset-value (NAV) of money market funds in the U.S., which has climbed since late 2011. The indicator has had a strong inverted-correlation with the equity market (S&P500 index) since the year 2000. The exception was in 2005-2007 due to the Yen-Dollar carry trade, when investors borrowed low-cost yen to purchase assets in dollar terms. While some investors might take issue with us about the explicit relationship between 2005-2007, we believe the indicator is worth mentioning as it shows that some investors’ fears are rising and they are opting to hold more cash, a trend that started in late December 2011.
Fig 10. US money market fund asset
0
200
400
600
800
1000
1200
1400
1600
1800
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
Jan-
00
Jan-
92
Jan-
93
Dec
-93
Dec
-94
Dec
-95
Dec
-96
Dec
-97
Dec
-98
Dec
-99
Dec
-00
Dec
-01
Dec
-02
Dec
-03
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
ICI US Money Market Mutual Funds Assets
S&P 500
Money fund (mnUSD) S&P 500 Index (points)
?
Source: Bloomberg, KS
Dollar-Yen Carry trade
4242
42
Floods impact on GDP and earnings growth Impact from last year’s floods is an additional risk factor to the Thai equity. We expect 4Q11 SET earnings to drop -1% QoQ and -4% YoY. Excluding Energy, earnings are expected to decline -16% QoQ but increase +3% YoY. Such 3% YoY is considered to be low compared to the normal growth of 5-15% in the last 3 years. As in the past 6 months, 1Q12 is expected to see high volatility with downward trend in share prices. Without any shock coming from the EU, we expect SET’s downside at 900 and 812 if EU gets into a crisis.
Better prospects by the second quarter Market condition is expected to improve by 2Q12, assuming that EU situation is resolved. By then, the market would turn its focus on the U.S. and China. For the latter, inflationary pressure should ease enough to allow the People's Bank to cut interest rates and stimulate growth. This would be a bullish catalyst for the equity market. Meanwhile, if we slow growth continues in the U.S., we can expect QE3 to be put in place.
4343
43
Locally, earnings in 2Q12 should improve as the impact from floods abates. Many manufacturers are expected to see full recovery by the quarter, boosting 2Q12 earnings. Meanwhile, local politics should stay relatively calm during the first half of 2012 as the Pheu-Thai party (PT) spends time drafting a new constitution and the process to draft the new one will take months. Political tension may intensify from about mid-year when the draft is presented for public hearing, closely coinciding with the end of the 5-year ban on 111 members of Thai-Rak-Thai party (TRT). Fig 12. Expected SET Index movement
750
800
850
900
950
1000
1050
1100
1150
1200
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
1030pt
1100-1150pt
812pt
900pt
Key to watch:1. Progression of Euro debt woes2. US economy recovery3. China stimulus & monetary easing4. Domestic political atmosphere
Source: KS
How to invest for the first half
We see a volatile market for the SET Index with limited upside but a 13% decline to 900 or, on the worst-case, a 23% fall to 812. We thus recommend investors to reduce equity exposure and the portfolio’s beta by focusing on defensive plays such as Food and Agriculture, Commerce, Utilities, ICT and Media which have high yields. Stocks such as CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW and BAFS are preferred. Post consolidation, we expect the recovery of the equity market to be triggered by EU resolution. Then we would prefer big cap and high-beta stocks such as PTT, TOP, PTTGC, KTB, SCB, AP, SCC and BANPU. (Figures 13 and 14 provide more details.)
Sideways
Fig 13. Key triggers for each scenario Scenario 1 - Correction Scenario 2 - Meltdown Period 3 - Relief and rally
● Slow global economic growth
● Weakening of THB exchange rate
● Soft listed companies earnings
● Concerns about the Euro debt crisis
along with with banks capital
adequacy, refinancing ability of Italy
and Spain
● Downgrade of core Euro countries
such as France
● Break-up of the Euro causing
financial flows disruption
● Global economy grows slower than
expected
● Some Euro countries might need
support from the EU or IMF
● Substantial appreciation of the USD
dollar
● Global "sell-off" of risky assets
probably followed by a v-shape
recovery
● China's easing monetary policy leads
to increase in risk appetite
● US rolls out new stimulus package
(QE3)
● ECB introduces new and more
convincing measures (eg joint euro
bond)
● Improving global economy
Source: KS
Fig 14. Which stock, which sector?
Scenario 1 - Correction Scenario 2 - Melt down Period 3 - Relief and rally
Direction/Target Downside to test 900 Downside to test 812 Target rally 1100-1150
Focused sector Food and Agri., Commerce, Utility, ICT, Media and high-yield stocks
Food and Agri, Commerce, Utility, ICT, Media and high-yield stocks
Banking, Energy and other big cap stocks
Stock
Domestic & Defensive plays:
CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW, BAFS
Domestic & Defensive plays:
CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW, BAFS
High beta and Big cap:
PTT, TOP, PTTGC, KTB, SCB, AP, SCC, BANPU
Speculate by theme ITD, SIRI, THCOM, HEMRAJ, KK, KSL, LOXLEY
ITD, SIRI, THCOM, HEMRAJ, KK, KSL, LOXLEY
Source: KS
Fig 15. Political calendar in 2012
2012 Key events
Draft of the 2012 Budget Act January
Draft of the amendment of constitution to the council in term1
February Third report from the "Thai Truth Committee"
Draft of the amendment of constitution to the council in term2 and 3 (tentative) Reconciliation or Prong-dong Act
March - April
(tentative) Borrowing act to finance future investment programmes
Set up of the third "Constitution Draft Assembly" to make changes to the Constitution May - June
31 May – Ban of 111 Thai Rak Thai MPs will be lifted
Expired of the "Thai Truth Committee" July 26 July – Mr. Thanksin 63rd Birthday
Closing of the parliament's ordinary session (able to have debate of no-confidence ) August Draft of the 2013 Budget Act (Populism?)
September - October Bureaucratic and military reshuffle
November - December Cabinet reshuffle?
Mr. Abhisit bloodshed case against red shirt protesters (91 dead bodies) No exact time frame Impeachment of Ministers/ MPs
Source: KS
4444
44
4545
45
Thai Banks: The FIDF dilemma Transferring FIDF’s liability to BoT The Cabinet on 4 January approved in principle four laws that: 1) authorizes the Bank of Thailand (BoT) to issue Bt300bn in soft loans to banks to lend to flood-affected victims; 2) transfers responsibility for the Financial Institution Development Fund’s (FIDF) debt burden and interest payments to the BoT; 3) allows the government to borrow Bt350bn for flood-prevention programs; and 4) establishes a Bt50bn insurance fund. The current size of the FIDF debt is Bt1.14trillion, originally incurred from attempts to save the insolvent financial institutions in the 1987 financial crisis. The transfer of responsibility to the BoT raises the question of how the central bank is going to fund the expense and debt repayment. Annual interest expense used to be Bt60-70bn but has fallen now because of lower interest rates. Although details have yet to be finalized, a likely solution would involve raising the deposit insurance fee from 0.4% currently charged by the Deposit Protection Agency or DPA. In the event the new law is passed and the BoT decides to collect higher fees from the banks, the additional fees, combined with the current 0.40% would be 0.60% (+20bps from the existing rate) to the ceiling of 1% (+60bps from the existing rate) and the impact on banks' bottom lines would be -6% (mostly likely case) and -19% (worst-case). Higher impacts are expected for TMB and TCAP due to their low net profit levels. The uncertainty means weakness for banks share prices which presents opportunity to accumulate for the following reasons: 1) the share prices of most banks have already declined to a level that reflects the downside risk of higher fees under our most likely case (see Figure 16); 2) there is a chance that the BoT might decide not to charge higher fees, but seek alternatives, such as to target higher returns from its assets/reserves to service the FIDF's debt; and 3) if the Council of State interprets that the proposed law as violating the Constitution or that the law should be issued as an act and not an emergency decree.
Fig 16. Fees contributions by banks in different scenatios
Current DPA fees +20bps to 60bps +30bps to 70bps +40bps to 80bps +50bps to 90bps +60bps to 100bps40bps % of NP Bt mn % of NP Bt mn % of NP Bt mn % of NP Bt mn % of NP Bt mn % of NP
Sector weighting & top picks Upgrade Utility to Overweight We upgrade our rating on Utilities to "Overweight" from "Neutral" as we prefer sectors with high earnings visibility in the current global climate. However, we downgrade Tourism and Property to "Underweight". We believe that Tourism will be affected by slower in-bound international tourist numbers amidst the rising economic concerns. For Property, the sector will face tighter margins due to rising costs after the floods. We maintain “Overweight” ratings on Food & Agriculture, Contractor, Commerce, Healthcare and Media. Our top picks are PTT, KTB, CPF, GLOW, STEC, AP, MAKRO, MAJOR and BH. In anticipation to market volatility, we recommend active investors to focus on high-yield stocks such as CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW and BAFS. To boost the portfolio return, investors might make use of corrections to accumulate stocks with good investment themes (and in some cases, speculative appeal) such as ITD, SIRI, THCOM, HEMRAJ, KK, KSL and LOXLEY.
Fig 17. KS’ portfolio
Sector Current Weight Previous Wt Recom. TopRecommended from Nov 7 / Sector Wt. Picks
Fig 21. 2012 country valuations Fig 22. SET PER discount to region
HongKong 8/12%
India 12/15%
Indonesia 11/17%
Malaysia 12/12%
Singapore 12/12%
S. Korea 8/15% Taiwan 11/20%
Thailand 9/16%
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
10 12 14 16 18 20 22
ROE (%)
PER / Net Income Growth (%)
0
10
20
30
40
Jan-
07
Apr
-07
Jul-
07
Oct
-07
Jan-
08
Apr
-08
Jul-
08
Oct
-08
Jan-
09
Apr
-09
Jul-
09
Oct
-09
Jan-
10
Apr
-10
Jul-
10
Oct
-10
Jan-
11
Apr
-11
Jul-
11
Oct
-11
SET PER
Regional PER
-60%
-40%
-20%
0%
20%
Jan-
07
Apr
-07
Jul-
07
Oct
-07
Jan-
08
Apr
-08
Jul-
08
Oct
-08
Jan-
09
Apr
-09
Jul-
09
Oct
-09
Jan-
10
Apr
-10
Jul-
10
Oct
-10
Jan-
11
Apr
-11
Jul-
11
Oct
-11
Source: Bloomberg consensus Note: Country PER, EPS Growth, As of 6th January 2012
Source: Bloomberg
4848
48
Disclaimer For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or sell, or a solicitation of an offer to buy or sell any security. Although the information herein was obtained from sources we believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any error or mistake contained herein. Further information on the securities referred to herein may be obtained upon request.
