SCB Securities Co., Ltd. (SCBS) sees the economic cycle changing from reflation to stagflation and targets the SET Index 2022 reaching 1,600 points based on fundamentals. The recommended investment strategy is to hold on to large caps and passive stocks with strong earnings growth prospects and strong balance sheets to minimize volatility and protect against unexpected events. Top picks for 4Q21 include BEM, KCE, OSP, SECURE, and ZEN.
In revealing its investment strategy recommendations for this year's final quarter, SCBS Managing Director & Chief Research Officer Sukit Udomsirikul said that the economic cycle is evolving from reflation to stagflation, signifying a slowing economy but with rising inflation. The market has adjusted the growth outlook downward because of the spread of the COVID-19 Delta variant outbreak and China's growth issues, while raising concerns over rising inflation due to supply chain disruptions. Concerns for an economic slowdown include risks from the Delta variant, issues involving a major Chinese real estate firm, and the Fed's QE tapering dragging down the economy and increasing risks to financial assets. As central banks' total assets decline, market returns will remain relatively low. For China, the tighter regulations imposed on financial institutions will affect high risk businesses, particularly the real estate sector as evident in the case of Evergrande, China's second largest real estate company in China which is at risk of default. Additionally, when the yield curve is adjusted for bear or bull flattening, the overall return on risky assets (including the SET), remains positive but will decline to mere single digits.
Regarding Thai economic trends, the latest Thai economic figures released have shown some improvement after a slow decline in the number of new COVID-19 cases, while the vaccination rate continues to rise to more than 500,000 a day, prompting the government to ease lockdown measures in red provinces. However, economic figures have signaled a significantly worsening adjustment, especially for domestic consumption. Therefore, we maintain our forecast for Thai economic growth at around 1% this year, down from our previous forecast of 2% due to impacts from the latest round of lockdown measures. We believe that the outlook for the Thai economy depends on the COVID-19 situation based on current circumstances. Economic activities have started to resume slowly, similar to projections from the SCBS model.
Thai stocks: The outlook for 4Q21 is for a generally strong quarter with positive returns at 4% on average and increasing by almost 60% compared to historical data. The fourth quarter will be the best period for high-beta stocks, such as small cap, value, and cyclical stocks. However, it might be different this time, fueled by concerns over stagflation, margin pressures, QE tapering, and higher political risks that could increase market volatility. In dealing with increasing fluctuation, we recommend that investors should cling to large companies and passive stocks with strong earnings growth prospects and strong balance sheets to offset volatility and prevent any impact from unexpected events.
Top picks for 4Q21 will be stocks with unique characteristics, comprising: 1) Passive stocks; 2) Stocks that will benefit from reopened economic activities; 3) Stocks with high pricing power; and 4) Stocks in new industries which can adjust well to risks from macroeconomic factors. Recommended stocks include BEM, KCE, OSP, SECURE, and ZEN.
- BEM: The company is less dependent on external factors. The number of passengers is expected to recover continuously following the easing COVID-19 measures, following the increase in the inoculation rate in Bangkok and reduced number of newly infected cases. Traffic volumes on expressways have resumed quickly and there is also the probability of winning the Orange Line bidding.
- KCE: The company is likely to beat HoH and YoY earnings in the second half of 2021 amid a growing industry outlook. The company can pass their costs on to customers. Due to the high demand for its products and limited shortage of electronics, the baht exchange rate will be another factor boosting an increase of profits.
- OSP: This is a passive stock with low volatility, benefiting from resuming economic activities. The recovery in the domestic market of essential goods and beverages will help reduce the impact from Myanmar's volatility, which accounts for 10% of revenue.
- SECURE: This is a small-cap stock in the cybersecurity industry expected to render good growth prospects. Its products are expected to be in high demand for investment for the next three years. It is also categorized as a new business-themed stock with a long-term S-curve.
- ZEN: The gradual easing of lockdown measures has seen the company's earnings recovering from their lowest level. The strategy of accelerating the expansion of their franchise business to more than 30 branches in the second half of 2021 will result in an increase in profit margins. It is estimated that earnings will be profitable in 2022.