KBank Multi Asset Strategies May 2019 Kobsidthi Silpachai, CFA [email protected]KResearch [email protected]KSecurities [email protected]FX market monitor page 1 Fixed income monitor page 7 What is one man’s gain is another’s loss page 14 Economic monitor page 18 Equity market monitor page 22 “KBank Multi Asset Strategies” can now be accessed on Bloomberg: KBCM <GO> Disclaimer: This report must be read with the Disclaimer on page 37 that forms part of it
The Chinese Yuan rebounded since the fourth quarter of 2018, appreciating by almost
4% from the level just below 7.0 against the USD in October 2018 to trade around 6.7 in
April 2019 (Fig. 1) as markets turned more optimistic about the Chinese economic
outlook on the back of easing policy measures, the progress of US-China trade talks, as
well as the projected investment inflows from foreign investors.
Both fiscal and monetary policy easing measures have resulted in upbeat
economic data, hence, strengthening the Chinese yuan. The cuts in bank‟s
reserve requirement ratios and the targeted-Marginal Lending Faciilty for small
banks have boosted domestic liquidity. As the data revealed, banks‟ new loan
growth rose to 13.5%YoY in Q1 2019 from 13.2%YoY in the previous quarter.
Plus, we have seen both business and consumer confidence improved due to the
stimulus provided by the government. These measures include (1) a reduction of
the value added tax for manufacturing, transportation and architecture sector, (2)
an imports tax cut for capital and intermidiate goods, and (3) a personal income
tax cut. Moreover, the push for infrastructure investment by local governments
has also supported the more-than expected GDP in Q1 2019 at 6.4%YoY.
Fig 1. US-China trade tariffs timeline
Source: Bloomberg, KBank
US-China progress towards trade deal would give a boost to global
outlook. Tension from trade conflicts between the US and China has been lifted
since the president Trump and president Xi met in G20 meeting in December last
year (Fig .2). As US agreed to suspend the plan to increase tariff from 10% to
25% for USD 200 billion goods imported from China, the yuan has continued to
gain since then. In the details, China has reportedly agreed to purchase more
goods from the US, particularly the agricultual products. Moreover, China‟s Xi
3
Jinping has recently vowed to increase the intellectual property protection. With
that said, the markets have now expected both sides to reach an agreement by
May or June 2019 which would support the sentiment of the yuan going forward.
China’s capital market liberalization would attract foreign investment, thus
increasing demand for the Chinese yuan, given the fact that (1) MSCI annouced
in March 2019 that it will add more weight of the Chinese A-share from 5% set in
2017 at 5% to 20% in 2019 into its index calculation. (2) 364 onshore Chinese
bonds will be included into the Bloomberg Barclays Global Aggregate Index over
the next 20 months. Also, the (3) National People's Congress (NPC)‟s
adjustment of the foreign investment law by banning forced technology transfers,
which will become effective in January 2020. These factors would attract both
portfolio and direct investment flows into Chinese markets.
Outlook for international trade to remain gloomy due to
global economic downturn
Asia exports are to remain on the downward trend, at least until the third quarter of
2019. As for the outlook of Asian exports, we expect Asian exports to remain weak
despite the US may agree to lift some ofthe tariffs previously imposed on China. This is
reflected by the fact that the global economic growth has also surpassed it peak. The IMF
has recently revised global growth in 2019 downward to only 3.3% from 3.6% in 2018, a
downward revision of 0.2pt from January‟s forecast. With the cuts in growth projections in
most major economies, including, Eurozone, the US and the UK, we expect most Asian
exports to face a downward trend, still. Asia‟s export growth have remained in the
contractionary teritory over the past 4 months and are likely to continue to dip further at
least until Q3 2019 due to slower demand and high base effects last year, in which the
exports value peaked in October 2019 (Fig 3).
Fig 2. Exports growth in Asia
-5.8
-20
-10
0
10
20
30
2015 2016 2017 2018 2019
China Total Asia Exports exclude China Thailand
%% YoY, 3mma
Source: CEIC, KBank
4
Stronger yuan and its implication on Asian currencies
The tensions from trade talks between the US and China have dragged the Chinese
yuan down significantly in 2018. The yuan depreciated as much as 11% against the
US dollar from more-than-2-year-low of 6.27 to almost 7.0-level in October 2018. By
focusing on the period where the US kept on threatening to impose additional tariffs on
imported goods from China in April to June 2018, the Chinese yuan depreciated 1% on a
dollar per month on average. As a result, Asian currencies fell significantly on a dollar, on
monthly average, across the board (Fig. 4) as markets perceived the US-China trade
protectionism tensions to transmit to Asian economies through the slump in exports.
However, Since December 2018, after the US and China agreed to negotiate the trade
deal and the talk saw significant progress, most Asian currencies rebounded. This was in
exception for Korean won, Taiwan dollar, and Australian dollar whose currencies are
closely linked to the outlook of China‟s economy and US trade policy. Investors have
been waiting for the agreement for US and China to be finalized before they can regain
confidence over these currencies.
Fig 3. Impact from the escalation/dissipation of risk to China on FX
CNY-1.0
CNY1.0
JPY-0.3
JPY0.3
AUD-1.7
AUD0.1
TWD-0.9
TWD0.2
KRW-0.9
KRW0.3
SGD-0.8
SGD0.6
MYR-0.7
MYR0.7
PHP-0.8
PHP0.9
ZAR1.0
INR-1.5
INR1.1
THB-1.1
THB1.2
IDR-1.4
IDR1.9
Trump tariff threat (April 2018) 02/2018-6/2018 Fed signal lower path of hike & Fear of globalslowdown (Dec2018) 11/2018-02/2019
Average Monthlyappreciation
Average Monthlydepreciation
Source: Bloomberg, KBank
5
Fig 4. linkages of Chinese yuan and other Currencies
AUD
PHP
JPY
INR
KRW
ZAR
MYR
THB
SGD
TWD
-0.5
-0.3
-0.1
0.1
0.3
0.5
0.7
0.9
1.1
1.3
1.5
-10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0
stronger correlation with CNY
aver
age
%M
oM F
X a
fter
pres
sure
from
U
S-C
ina
trad
e w
ar a
bate
d (N
ov18
-Feb
19)
Source: Bloomberg, KBank
We expect that further appreciation of the yuan will support the Korean won,
Taiwan dollar, and Australian dollar. This reflected the fact that these currencies have
relatively underperformed, despite of their strong correlation with the Chinese yuan (Fig.
5). As for the Thai baht, the impact of stronger yuan is likely to be relatively smaller as the
Baht against US dollar had already appreciated significantly more than other Asian
currencies since trade pressure eased since late 2018. In January, the Baht appreciated
at 4.02%, while Asian currencies depreciated by 1.35%, on average (Fig. 6) and the
depreciation of the baht in the following months have not been crucial. We expect the
Thai baht to underperform other Asian currencies, in the event of positive trade talk from
the US and China.
Fig 5. Historical movement of USDTHB in a year
8.99
0.10
4.02
-0.88 -0.71 -0.57
6.64
-4.01
-1.35
-0.34 -0.20
0.54
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
2017 2018 FX changeJan-19
FX changeFeb-19
FX changeMar-19
FX changeApr-19
Thai baht against US dollar Asian currencies index
Currency appreciate
% change
Source: Bloomberg, KBank
6
KBank “FX Markets Insights”
Currencies FX outlook and comments
EUR
Sentiment on the euro is likely to remain weak from subdued economic growth outlook and the easing policy stance from the ECB. We expect the ECB to hold rates for the rest of 2019 as it promised to hold rates at current levels “at least” until the end of 2019. Meanwhile, more easing measures i.e. the incoming TLTRO III (to be effective in September) as well as weak sentiment on Eurozone economy is to keep the euro on the weakening path. As for the US dollar, the global risk off and fear of Eurozone slowdown are to keep demand for US dollar intact.
Bearish
JPY
The yen would be affected by global risk-off sentiment and geopolitical concerns. The global risk-off sentiment, especially from weakening global growth and Brexit are the major factors supporting the yen, going forward. However, the yen could be traded lower in case of positive sentiment from trade talks between the US and China. Also, monetary policy divergence between the BOJ and the Fed is also the factor weighing on the yen, when the fear of global risk dissipates.
Bullish
GBP
GBP is likely to stay volatile, pressure from Brexit eased, watch for BOE. EU agreed extends the Brexit deadline until October 31. This allows some pressure on the GBP to be lifted, at least temporarily. However, the next key event would happen on May 23 when the UK has to participate in European parliamentary elections and the EU summit in June. On monetary policy front, we do not expect the BOE to raise policy rate this year as the outlook for Brexit remains uncertain and the declining inflation.
Neutral
CNY
Conclusions from trade talk between US-China and effect of policy boost on Chinese economy are to continue to support the Chinese yuan. As markets are expecting positive conclusions from trade talk between US-China by May or June outlook for Chinese yuan has been more optimistic as well. Also, the expected investment inflows from foreign investors on the back of China‟s capital market liberalization are likely to support the yuan. However, Chinese economic slowdown and subdued global trade growth are to remain major setback for the yuan.
Bullish
Asian currencies
Better sentiment from trade talks lift some pressure off the Asian currencies. Most Asian currencies have been affected by the dovish signal from their central banks and falling exports growth in Asia are the major factor to weigh on Asian currencies. However, positive result from upcoming trade talk between US and China could help strengthen currencies, going forward, especially for currency of economy with high linkages to China, such as Korean won, Taiwan dollar, and Australian dollar.
Bullish
THB
Thai baht is to face some weakening pressure, going forward. The main catalysts are the impact of global economic slowdown. On Thai domestic factor, political uncertainty and seasonality factor remain the factor for Thai baht to weaken. On Monetary policy outlook, the Fed‟s pause from monetary policy tightening and surplus of the Thai current account would help limit depreciation pressures of the baht.
Neutral
7
Focusing solely in May, the TGB yields with the most sensitive to
the flows are long-term bond yields or 10-yr TGB yield. That is the
Thai long-term TGB yields are to sharply rise in May due to the Sell
in May and go away effect.
This year, rebalancing foreign capitals to the high-yielding
emerging markets supports the seasonality while the Thai bond
market recording a net foreign outflow and the Fed’s rate pause
reduces a chance of the déjà vu.
Sell in May and go away
“Sell in May and go away” is the market trading adage which exhibits a seasonal pattern
of stock market behaviors that tend to underperform during the summer season (May-
October) relative to the rest six months of the year in the winter season (November-April).
The phenomenon was originally observed in London when professionals escaped from
the city during summer and came back to work later in the year. To avoid any adverse
events during absence, they pull out money from stocks, the relatively-risky assets and
resort to fixed-income securities.
Bouman and Jacobsen (2002)1 attempted to study the existence of this seasonal pattern
in 37 countries and found that this repeated occurrence showed up in 36 countries. The
pattern was found strongest in the UK and Europe. Jacobsen and Zhang (2018)2
expanded the scope of the analysis into 65 countries worldwide, including Thailand. The
results revealed that this pattern exists for the Thai stock market as the price return
during winter is somewhat greater than that during the summer time (Fig 1). Fortunately,
investors who do not realize this phenomenon will not be affected much as the returns in
both seasons still remain positive.
“Sell in May and go away” in the Thai bond market
The ratio of non-resident holdings in the Thai government bonds (TGB) had significantly
increased since 2010 to around 18.0% until recently. The TGB yields movement
especially those of the long-term bonds thus are dominated by these flows.
Through the lens of foreign investors, the Thai bonds are, of course, classified as risky
assets. The S&P and Fitch Ratings, the two most prestigious credit rating agencies, set
the long-term foreign currency of Thai sovereign credit at BBB+ while Moody‟s places
Thailand at Baa1. This is to say that Thai bonds are investment grade within the lower
medium tranche. The “Sell in May and go away” pattern may apply in the case of Thai
bonds in the way that foreign investors sell Thai bonds during summer and shift back to
1 Bouman, S., & Jacobsen, B. (2002). The Halloween indicator, "Sell in May and go away": Another puzzle.
American Economic Review, 92, 1618-1635. 2 Jacobsen and Zhang (2018). The Halloween indicator, “Sell in May and go away”: an even bigger puzzle.
February indicators tracked for mediocre economic growth
Economic indicators in March 2019 reaffirmed a broader slowdown in activities. Domestic
sector reported a slower pace of growth, while external sector were not out of the wood
yet.
Fig 1. Key economic indicators
Source: BOT, OIE, KResearch
The Private Consumption Index (PCI) reported a slowdown in activities in March.
The index rose 2.6% YoY, versus the 3.5% YoY in the previous month. Consumption in
non-durable items experienced a mild contraction as consumer shrugged off from
spending amid rising economic uncertainties. Meanwhile, growth in durable consumption
cooled down due to a high base effect. However, consumption for services remained
rather resilience, helped by tourism-related activities.
The Private Investment Index (PII) reported two consecutive months of contraction.
The index fell 2.1% YoY in March after it reported a decline of 2.8% YoY in February. A
slump in construction activities of -13.4% YoY as developers refrained from lunching new
projects before an enactment of LTV measure. A decline of 5.9% YoY in domestic
machinery sales attributed from a dismal demand for computer parts. Meanwhile, a fade
in demand for newly-registered motor vehicles for investment hinted that the boost from
the recent vehicle purchasing cycle might reach the peak.
The number of foreign tourist arrivals to Thailand experienced a mild decline. The
number of Chinese tourist arrivals declined 1.9% YoY, due to a high base effect.
Meanwhile, European tourist saw a considerable decline amid lackluster economic
performance.
Government spending rose marginally of 0.9%. A faster disburstment of investment
budget contributed for a rise in overall budget. Meanwhile, general budget disbursement
was rather flat after the government quickened the pulse of disburement in the previous
month.
On the external front, exports reported a contraction of 4.9% YoY due to a slump in
electronics export. Exports of computer and parts and ICs reported a sharp decline of
20.0% and 21.7%, respectively. This was resulted in late electronic cycle and
repercussions from US-China trade dispute that causing havoc on the supply chain. Going forward, KResearch expects that Thai export performance in 2Q 2019 would be
20
rather flat, comparing to the previous year. This is due to the high base effect from front-
loading activity and high petroleum prices.
Headline inflation picked up in April 2019, driven by food and energy prices.
Headline inflation edged up 1.23% YoY due to rise in argiculture and energy prices.
Meanwhile, core CPI rose 0.61% YoY. A persistence of dry and hot weather caused a
rise in meat and vegetable prices. Going forword, the impact of high-base effect of
energy prices shoud dissipate and adjustment in transporation costs should provide
some support for headlline inflation, but the overall inflation picture remains
benign.Therefore, KResearch expects that headline inflation may gradually increase to
an average of 0.8% in 2019.
KResearch views that Thai economic performance may stumble through the first
half of 2019 of 3.3-3.4%. However, we need to keep close eyes on the development of
domestic political situation because cloudy domestic political situation could undermine
business confidence in the near future. Going forward, Thai economy would find a silver
lining in 2H2019, given the new government would install within the late 2Q 2019 and
unveil series economic stimulus packages.
Global Economic Update
Risk toward global economy is tilting toward the downside, albeit the 1Q 2019 GDP
from major economies reported a better than expected.
In the first quarter of 2019, global economic growth was rather stabilize around its long-
term trend. The pivot of monetary policy and expected US-China trade deal gave a
glimpse of hope for a goldilocks environment might happen in the second half of 2019.
China, the US, and the EU economic growth came out with upside surprise. China
economy refrained from slowing further, thanked to fiscal stimulus from the government.
EU economy just avoided failing into recession. While, Italy returned to the growth path
and exited from technical recession. For the US, the growth accelerated from 2.2% QoQ
to 3.2% QoQ, along with improving consumer spending as well as a shrink in trade
deficit.
Unfortunately, series of hawkish trade tweets from president Trump ignited fear that the
tariff increase would derail the trade deal and this could result a detrimental effect toward
global growth. A plan to raise tariffs in USD200 billion from 10% to 25% would hit China
and its supply chain so hard and this impact could reverberate across ASEAN countries
from sapping Chinese import demand.
KResearch expects that the impact of trade escalation between US and China
could shelve our export growth up to 0.6% in 2019 from the forecast of 3.2%.
According to our base case, we views that tariffs on the USD 200 bn tranche of imports
from China could maintain at current status quo of 10%. A full-blown trade war would be
avoided because both the US and China economy are badly hurt from it. Therefore, we
think that a threat to raise the tariffs is a negotiation tactic more than a last-minute
breakup. Admittedly, Trump‟s twitters mark a possible material escalation in the one-year
trade battle between the US and China and increases the fear that the trade situation
appears to be rapidly careening toward a worst-case scenario. On moderate escalation
scenario where tariffs on the USD 200 bn tranche of imports from China are raised to
25% in the second half of 2019, our export growth may decline 0.2% from our base case.
21
In the significant escalation scenario where the full value of what China exports are
taxed, our export growth may decline 0.6% from out base case.
Impact of the trade dispute between US and China toward our export forecast
22
We maintain a positive market view with our 12-month forward SET
Index target of 1,750. After a positive YTD performance of 7%, we
see a good balance between negative and positive factors to
influence the SET Index, and thus we believe further upside looks
limited in the near term.
The US economy should remain far from a potential recession, and
the global economy still looks solid with a low NY Fed recession
probability, strong wage growth and strong service PMI. The
ongoing US-China trade talks and China’s economic stimulus
measures should serve as key factors to protect against downside
risk for the Thai market, while the key drag could be a bumpy
political transition, which would have caused damage without
positive support from the global environment. While 4Q18 earnings
were disappointing, we expect brighter earnings in 1Q19 with the
improvement likely to be broad-based across all key sectors.
Our revisit to a market EPS return analysis suggests that near-term
upside to the SET Index looks limited as we are at the half-way
point between mean and -1SD. For the Thai market to perform
further, we believe upcoming 1Q19 results need to surprise the
market to the upside both quantitatively and qualitatively. While
results so far have exceeded consensus, they were not decisively
good as they carried some weak quality.
Strategist’s preferred sectors and top picks
We have removed utilities from our preferred sector list as it has performed well, and we
replace it with infrastructure funds, among which TFFIF is our top pick.
Commerce sector (CPALL, BJC, HMPRO). The Commerce sector remains our
key call as we believe it will benefit the most from an ongoing improvement in
private consumption, government stimulus measures for low-income earners and
potential measures to boost the provincial economy.
Agro-business sector (CPF). We still like the sector for its solid earnings driven
by a margin recovery supported by better product prices and subsequently strong
profit growth. All three stocks including CPF should report strong 1Q19 core
earnings growth.
Civil contractors (STEC). We remain positive on the sector with STEC our
preferred play. The key upcoming positive catalyst is a potential speed-up of
public project tenders.
Petrochemical (SCC). Although we are relatively bearish on Thai
petrochemicals, we continue to like SCC on its non-chemical exposure,
especially the packaging business, of which 1Q19 performance was still strong
Equity market monitor: Global tailwinds, limited near-term
upside
Equity Research Team
23
with 8% YoY EBITDA growth and 14% contribution to the group‟s net profit (+2
ppt YoY).
Big banks (BBL). We still like big banks as we expect credit cost to continue to
decline. Among big banks, we like BBL the most as the overall asset quality trend
is still improving and least affected by the continued weak bancassurance
business.
Infrastructure funds (TFFIF). TFFIF is our preferred fund play due to 1) its
Average SET Return of last 6 elections 4.4% 1.5% 0.7% -0.1% 0.0% 0.2% 1.0% 1.7% 2.8% 2.6% 3.0%
Average SET Return of last 3 elections 1.7% -1.4% -5.0% -1.4% -0.9% -1.0% 1.5% 3.3% 3.7% 3.1% 3.1% Source: SETSMART, KS Research, 2014 election was later nullified by the Constitutional Court
Fig 21 Avg 5Y SET return pre- and post-elections
Fig 22 Avg 3Y SET return pre- and post-elections
4.4%
1.5%
0.7%
-0.1%
0.0% 0.2%
1.0%
1.7%
2.8%2.6%
3.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
-8M -6M -3M -1M -2W -1W -1D +1D +1W +2W +1M
Average SET Return of last 6 elections
1.7%
-1.4%
-5.0%
-1.4%-0.9% -1.0%
1.5%
3.3%3.7%
3.1% 3.1%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
-8M -6M -3M -1M -2W -1W -1D +1D +1W +2W +1M
Average SET Return of last 3 elections
Source: SETSMART, KS Research Source: SETSMART, KS Research
Market EPS return suggests limited further upside in near term
We have revisited our analysis of market EPS return in which we forecast the SET Index
already troughed at 1,597 (Jan. 11). At the current SET Index level, which translates into
a market EPS return of 4.14% (excluding the 10-year government yield), near-term
market upside looks limited as the level is already halfway between mean and -1SD.
Unless there are new catalysts both domestically and globally or remaining 1Q19 results
come in much more strongly than expected, a further rerating of the SET Index (in other
words, a further decline in market EPS return) looks unlikely in the near term. Another
0.25 ppt improvement (i.e. at -0.75SD, or 3.71% market EPS return) would imply a SET
Index at 1,781, which in our opinion would be difficult to achieve in the near term. Note
that the SET Index at -1SD on market EPS return is approximately 1,898, a level that
indicates a bull market, in our opinion.
31
Fig 23 Market EPS return (2008-present)
Fig 24 Market EPS return (2014-present)
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
12.00%
Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18
STD-2 STD-1 Mean= 4.9% STD+1 STD+2
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18
STD-2 STD-1 Mean= 4.9% STD+1 STD+2
Source: Bloomberg, KS Research Source: Bloomberg, KS Research
1Q19 earnings: good but not decisively good
So far banks (including KTC), DTAC, PTTEP and SCC, have reported earnings that beat
our forecasts although some lacked quality. PTTEP posted the best set of results so far.
Banks. Our eight covered banks reported aggregate 1Q19 earnings of Bt44.8bn, up 10%
YoY and 33% QoQ, beating our forecast by 10% mainly on higher-than-expected
investment gains from the sale of NTL and interest income from AQ. Earnings grew 9%
YoY on higher net interest income and lower provisions. Excluding the one-time NTL gain
and AQ income and employee benefit expenses, earnings would have been Bt37.2bn,
down 9% YoY but up 8% QoQ. The overall results would have been considered good if
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