Analysis: Market euphoria could burn some investors as economic turnaround is not around the corner

The momentum of trading on the Stock Exchange of Thailand (SET) seems to have returned as daily trading values have seen a marked increase over the past months.

As investor’s confidence returns the daily trading volumes over the past 3-months has seen an increase of about 13-14 per cent from 67 billion per day in April to 76 billion baht per day in June.

During the last quarter monthly turnover of the SET has hit record highs with average daily turnover reaching 76 billion baht per day in June 2020. Perhaps this is the highest daily turnover in SET’s history.

Surprisingly, this has come at a time when the country, and whole world is going through an unprecedented crisis, all at the same time. On the previous occasions in last 25 years, only one or two continents or regions had faced a crisis but this time countries all around the world are suffering and at the same time.

While the second wave of the Covid19 has started to gain momentum, and is very visible in the America, Thailand has somewhat escaped the spread the infection. Thailand has not reported any spread of virus among residents in more than a month – almost all new infections are related to persons returning from abroad, or imported infections, according to the Thailand’s Covid 19 report center.

Although there was a small glitch on July 10th with the Egyptian marines and the Sudanese diplomat, the situation in Thailand seems to still be in control and it is positively surprising, and perhaps puzzling, how Thailand has contained the Covid19 spread.

As the economy reopened slowly since last month, residents have started to spend, travel, and visit bars. While most hotels in Bangkok remain shut or have opened mainly to capture residents dining business, a few brave hoteliers in beach towns – Pattaya, Phuket, and Hua Hin- have opened and reporting high occupancy over the weekends.

In the absence of tourists, the activity levels in the beach towns however remain painfully low. A few of the malls and restaurants have shut again after trying their luck in re-opening early last month.

This leads to the puzzling question of why are Thai investors so excited?

It is becoming apparent that due to remarkably high dependence on exports and tourism income, Thailand is perhaps the most affected economy in the region.

Tourism Authority of Thailand is predicting a fall of 80% in arrivals to 8.2 million this year including 6.7 million recorded before flights were shut in late March. This cuts the direct revenue linked to tourists to just Baht 396 billion from more than 3 trillion baht seen in 2019. To somewhat counter the fall, the government has planned to offer subsidies of 22.4 billion baht in the hope that it may lead to 50 billion baht in spending by residents in the second half this year. Many economists are predicting a fall of over 10% in exports.

Our attempts to seek logical reasons behind the investor euphoria have failed, and we are left to speculate only a few possible psychological reasons. And here are the possible reasons that we think could be behind the liquidity in the market.

  • Cheap Liquidity

Equity markets worldwide fell to their yearly low between 2nd and 3rd week of March. A sharp fall in global markets, and somewhat unified political will to soften the economic shock, almost every country started providing relief by creating unprecedented liquidity. While the liquidity injections by the reserve and federal banks does not go straight into the hands of investors, it leads to sudden fall in interest rates, thereby softening impact on borrowers.

Low interest rates encourage individuals to increase leverage. One of the sources of leverage at low cost is private banks. According to Asian Private Banker, in 2019, AUM with private banks in Asia increased 20.6% to 2.0 trillion US dollars. While this may not fully explain how government-created liquidity ends up helping financial markets, private banks have become significant participants. Thailand does not have an established private banking system, yet there is significant money that is invested in Thai stocks via wealthy residents who invests via private banks.

  • Go with the flow

SET’s correlation with the word markets in the short period is quite high. Addition of liquidity by many countries led to rebound in the equity and bond markets.

The table below shows that most leading indices in the world have recovered at least 25% from its low of the year. Taking in other measures, SET Index is trading 23% below its 52 week high level, one of the worst performance vs peers. This shows that investors acknowledge that Thailand is perhaps worst placed than it was few months ago.

  • Bet on the recovery

Like in the other markets, Thai investors are betting mainly on the recovery plays.

The table below shows that among the worst performers is Thailand Banking sector with price fall of 39% year-to-date in 2020 – and this is despite a 19% rise in price from its low on 23 March 20. The banking sector index is below 45% of its 52-week high.

Similarly, the media, property and even the health care sector which is heavily dependent on medical tourism is well below their year high level. The investor darling, the commerce sector and information and technology indices, are also trading below 52-week high.

These two sectors are performing better than the SET Index as investors are betting that consumers and telecom companies will not be that severely affected as other companies.

Momentum investing

For an analyst, price to earnings ratio is perhaps the most used measure to ascertain value of the stock or an index. And this despite that fact earnings forecasts are somewhat skewed by personal bias, and there is no tested method to determine a PER multiple.

Yet, this crude measure is a good starting point for those who wish to sell a stock. And those who buy a stock often ignore it. For example – Carabao and Gulf Energy, two best performing stocks in the SET50 Index this year, are trading on PER of 31x and 77x respectively. Yet investors are buying these overly expensive stocks because the price momentum driven by expectations of rising earnings, irrespective of the rate of growth.

But investors need to be careful with momentum investing.  Momentum investing is what the name suggests. If momentum of profit growth, and/or stock turnover is positive, Buy the stock. And Sell the stock if momentum is negative.

It is difficult to gauge the profit growth momentum because the information providers, i.e. analysts are often late in their analysis. Insiders and speculators are often well ahead of analysts and often start the momentum based their conjectures or expectations built on their own either collectively or individually.

To gauge the stocks in momentum we calculated trading value of stocks with market cap of more than Baht 10.0 billion. Table below shows the total turnover in Baht billion for 5 days ending last Friday and change in value versus previous week i.e. 5 trading days.

On the top are STGT, AOT, STA, PTT, EA etc. While heavy trading in STGT and STA is due to listing of STGT, sharp week-on-week increase in trading value of EA, SUPER, and PTL are a surprise. These stocks are showing positive momentum for reasons known to insiders or the market participants.

While we do not have information on changes in investor sentiment for EA and SUPER, we did some digging on PTL. Sharp share price in rise in PTL which makes industrial and food packaging films seems to have been driven by speculations that lockdowns during the Covid19 pandemic have increased demand for food packaging films. This is partially true as demand for BOPET film, packaging grade films, suddenly increased in Europe and America during the lockdown period as food delivery business increased. This was due to

  1. Increased delivery of food
  2. hoarding by packing material producers to avoid paying high price in future as is the case is the gloves industry
  3. fears that imports from China and Asia would be disrupted

By late May early June, demand in both America and Europe stabilized as competitive pressure led to increased exports from Korea and Thailand. India, perhaps the 2nd largest producer, also resumed production in June after 8 weeks of lockdown.

China, a leading exporter and producer of flexible packaging films suffered a different fate as price in domestic market fell due to oversupply arising from inability to export, and falling PTA price, a key raw material. China still relies on fresh food hence did not feel sudden rise by food delivery segment as much as seen in Europe during lockdown. This led to increased inventories and shutdown of small firms. If demand in the exports market remains high, Chinese producers will resume production.

By early June demand has stabilized. Latest research from Wood Mackenzie, a packaging specialist independent research house, suggests that, including rise in demand over March and April, flexible packaging demand growth in Europe will gradually stabilize at slightly at 5% growth in 2020 vs. 1.4% in 2019.

Though this is not a complete analysis, it provides strong evidence that

  • Demand for flexible packaging films is not dramatically high
  • Fall in raw material price may have increased short term profits
  • Resumption of supplies from India and China will may limit the price rise during the rest of the year. 

In a recent analyst presentation, PTL confirmed that Covid19 pandemic will not lead to material increase in demand for its products – while the demand for consumer staples will remain unchanged or rise a bit in the short term, industrial packaging segment may suffer from the slowing global economy and lockdowns.

However, this may lead to reduced raw material cost which will benefit the company. One possible upside may come from possible weakness in Thai Baht as PTL earns bulk of its revenue in US dollars.

Share price of PTL and its competitor AJ has increased 80% and 116% in last 3 months. It is possible that a few analysts may write positive reports on the company and increase target price.

Our discussion with industry specialists and the company sources reveal that any uptick in the profit is small and short lived.

In light above, we suggest our readers to take profit in PTL and AJ.


In our note early this month, we suggested that share price of STGT may double from the IPO price. Last week the company held an analyst meeting to update its improved profit outlook with one simple message that it has sold out its production until Sep 2021. Its selling price is subject to market conditions.

Analysts have set the target price of 90 baht a share based on next year earnings. We feel analyst projections may prove to be optimistic as it is hard to project next year earnings given new supply may appear and initial rush to stock gloves may ease off by end of the year.

We advise taking profit in STGT. We are seller of STA as STGT has more exciting prospects. The controlling family of STA and a few other key shareholders have been selling STA recently – and perhaps buying STGT.

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