Thailand’s clouded prospects post-election


Thailand’s first general election post-enaction of the new constitution has finally come to an end after a 45-day delay.

The coronation of the new Thai king and the announcement of the election results coincided with US President Donald Trump’s announcement to impose higher tariffs on Chinese imports, which have impacted the benchmark SET Index’s performance along with other regional market equities.

On the political front, while many perceive the outcome as a divided general election result, it nonetheless falls within consensus expectation.

Based on the election result, the incumbent prime minister, Prayut Chan-o-cha, would require an additional 11 seats to succeed for a second term. We opine this scenario is likely to happen, as there are parties like the Democrat that isn’t in favour of the Opposition Pheu Thai party.

These parties could either choose to join Palang Pracharat in government or choose to be an “independent Opposition” within the lower house.

There could be resistance when it comes to getting fiscal policies and legislation to pass through given there are two dominant parties in the lower house.

However, as the Senate is made up of members handpicked by the National Council of Peace set up by the military, the policies proposed by Palang Pracharat are likely to receive more approvals from the Senate, thereby reducing some of the economic risk stemming from policy discontinuity.

Thailand’s first-quarter GDP growth slowed to 2.8% year-on-year (YoY) which is within consensus estimates and is the slowest growth pace recorded since 2014.

In expenditure terms, private consumption regained its prominent role to support growth and expanded 4.6% YoY.

Private investment growth decelerated along with government consumption. While the deceleration is broad-based, exports took the largest hit, contracting -3.6% YoY against the 2.3% YoY growth from the previous quarter due to slowing external demand from major trading partners amid trade uncertainty on the global front.

Historically, Thailand’s investment growth, as represented by gross fixed capital formation, tends to be weak across election periods as businesses and corporates hold back on capital spending and expansion plans over political uncertainty.

Thailand is also caught in the trade crossfire between the US and China. Global trade suggests that the restructuring of the global supply chain could be brought forward sooner than planned, which could extend the current slowdown in trade growth across the world.

Hence, we think there is more downside risk to growth and Thailand’s GDP growth numbers are likely to decelerate over the first half of 2019.

As of May 23, analysts have slashed their earnings forecast for the financial year 2019 (FY19) and FY20 by 6.7% and 6% respectively for Thai equities. Most of the earnings downgrade is attributable to the energy, financial and consumer sectors. These sectors sum to more than 40% of the total market capitalisation of the SET Index.

Being a net oil importer, Thailand’s energy companies have not been able to benefit from the higher energy price environment. Many of these companies are experiencing a compression in product spreads in their downstream operations, such as petrol and middle distillates as feedstock cost jumped, but selling prices have fallen along with softening aggregate demand.

These factors are setting a bleak earnings outlook for Thai energy companies for the rest of 2019.

The financial sector’s earnings prospects isn’t looking bright as well. Earnings estimates have been revised downwards by 8% year-to-date, as consensus expects muted profit and balance sheet growth.

Household demand for credit is likely to stay weak as household debt levels remain elevated, and we see a similar picture for businesses’ appetite for credit on political uncertainty.

Despite the Bank of Thailand hiking the interest rate last year, downward pressure on net interest margin may persist as banks compete for loans amid waning demand for credit.

For the consumer sector, a combination of decelerating domestic consumption plus a higher operation cost has compressed earnings. Large and more established companies such as Charoen Pokphand Foods pcl and Berli Jucker Food Co Ltd have operations overseas spanning across South-East Asia.

The baht’s enduring strength has resulted in further losses stemming from currency translation. The downward revision in earnings forecasts has left earnings growth for Thai equities at 0.5% and 9.4% for FY19 and FY20 respectively.

The price-earnings (PE) ratio for the SET Index is currently standing at 15 times and 13.7 times against our fair PE of 14 times, which seemed unattractive. Based on current estimates, the SET Index is estimated to deliver an annualised upside potential of 4.8% by end-2020.

A valuation contraction could be the main dragger on Thai equities although the drag may be cushioned by an expansion in both earnings and dividend.

Taking into account the increased downside risk to economic growth, dull earnings prospect on top of unexciting upside potential, we are downgrading Thai equities to ‘Neutral’.

The key upside risk to our call comes from stronger than expected fiscal spending and private investments. Upside risk could arise from decent progress in trade talks or a significant weakness in baht, which could facilitate recovery in exports.

For investors seeking capital growth within the Asean region, Indonesian equities and the Malaysian small-cap segments may offer better growth opportunities.