The recent decision by the Bank of Thailand to cut the policy interest rate has sparked significant market activity. The unexpected move led to a 20-point surge in the SET index, which crossed the 1,500 mark for the first time since August 2023. This decision came as a surprise to many, with most anticipating no changes until the year-end meeting in December. The 5-2 vote in favor of a 25 basis point cut has invigorated rate-sensitive sectors, including finance, property, and energy stocks.
The easing of monetary policy has also resulted in a depreciation of the baht following a period of steep appreciation.
This week, the index is predicted to trade sideways, likely capped by psychological resistance around the 1,500-point mark. Recent rallies driven by blue-chip stocks suggest tightening technical signals, while smaller, third- and fourth-tier stocks may see increased trading interest.
Current earnings reports from banks, which began last week and will continue this week, are expected to draw attention to third-quarter results, particularly in the real sector.
We anticipate a shift towards individual stock plays from broader investment themes, leading to a more diverse market selection. This environment will present opportunities for alpha returns during earnings season, especially for companies with strong or better-than-expected results, as well as those that, despite poorer performances, show signs of recovery.
Positive sentiment from the interest rate cut is significant. There is approximately a 50% chance that the Monetary Policy Committee will implement another 25 basis point cut to 2.0% in December, aiming to buffer the effects of slowing exports and support the economy. Ultimately, we foresee a total of two to three cuts, reducing the rate to 1.75% by mid-2025, aligning closely with pre-pandemic levels.
Although the recent cut will only minimally impact bank earnings—estimated at a 0.6% decrease—it is expected to enhance private investment sentiment, which will positively affect loan growth for major banks.
Lower funding costs will also benefit key financial entities, enhancing sentiment across the sector. This includes companies such as MTC and SAWAD, which are likely to see gradual improvements in their funding expenses as debenture rollover cycles progress.
Better-than-anticipated management of non-performing loans (NPLs) in the title loan segment presents an additional positive indicator, particularly with reports showing stable NPL ratios.
Key fundamental stocks stand to gain from reduced finance costs and improved yield gaps. Notable companies include BGRIM, GUNKUL, and GULF, which are well-positioned for these shifts.
In the transport sector, entities like BEM and BTS may not see substantial benefits from the rate cut, given their fixed-rate debt structures. However, easing rates could potentially enhance their fundamental value through lower discount rates.
Additionally, real estate investments are likely to benefit from the rate cut, increasing the yield gap and allowing for higher rental rates. Projected dividend yields this year stand at roughly 5-6%. With property developers managing a debt split of approximately 1:3 between fixed and floating rates, this cut could add 1-2% to our 2024 earnings expectations. ERW is positioned as a major winner in tourism, benefiting the most from floating-rate liabilities, followed by AWC and CENTEL.
However, risks remain, particularly relating to the potential for a US and global economic downturn. Notable concerns include:
- US purchasing power appears weaker than reported, despite strong retail sales largely driven by consumption goods. The contraction in durable goods and rising credit card default rates signal economic vulnerabilities.
- Semiconductor sales may be reaching a peak, with year-on-year growth nearing historical highs. Economic indicators from Taiwan suggest a contraction in the Electronic and Optical Manufacturing sector.
- The current investor sentiment remains overly optimistic, with cash positions at concerningly low levels, hinting at a possible market reversal if negative news emerges.
