kbank multi asset strategies · • in china, the pboc has announced its first reserve requirement...

KBank

Multi Asset

Strategies

January 2020

Kobsidthi Silpachai, CFA [email protected]

KResearch [email protected]

KSecurities [email protected]

FX market monitor page 1

Fixed income monitor page 7

Economic monitor page 12

Equity market monitor page 16

“KBank Multi Asset

Strategies” can now be

accessed on

Bloomberg: KBCM

<GO>

Disclaimer: This report

must be read with the

Disclaimer on page 20

that forms part of it

1

The outlook for global economic expansion in 2020 and some

positive development of trade talks between the US and China

have supported a better outlook for emerging market economies

this year. We expect the growth differential between developed

economies and emerging market economies to widen. This is

likely to be the factor to attract more capital inflows into

emerging markets, including Asia, hence pushing Asian

currencies higher.

Also, despite lingering weak outlook of Asian economies, the

policymakers in Asian countries have continued to ease the

financial conditions and are expected to roll out more stimulus

packages in order to boost economic growth. This would provide

a favorable condition for the economy to remain quite resilient as

we move into 2020.

Moderate growth in the global economy could attract

inflows into EM Asia

The outlook for global economic expansion in 2020 and some positive

development of trade talks between the US and China have supported a better

outlook for Emerging market economies this year. Though exports in most

economies in Asia are expected to remain soft as most of the previously imposed tariffs

between the US and China are still in place, the global fears of policy uncertainty and US

economic recession have abated (Fig. 2). Also, we expect the slightly better global

condition and accommodative fiscal and monetary policies to support economic growth in

most of the Asian economies this year. On the other hand, the growth differential

Fig 1: Asia Currencies move against the dollar (% change in 2019)

-3.6

-2.3-1.2

0.5 0.9 1.1 1.32.1

3.44.1

8.7

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

KRW INR CNY HKD JPY MYR SGD TWD PHP IDR THB

Currencies move against the dollar

Stronger

Source: Bloomberg, CEIC, KBank

FX market monitor: Global growth moderation, positive

outlook for Asian currencies

Peerapan Suwannarat [email protected] Warunthorn Puthong [email protected] San Attarangsan [email protected]

2

between developed economies and emerging market economies are likely to widen this

year (Fig. 3). This is likely to be the factor to attract more inflows to Emerging Market,

including Asia, hence pushing Asian currencies higher.

Despite the still tepid-weak outlook of Asian economies, we still expect the

emerging market economies to outperformed developed economies. Export-

oriented economies have suffered the most from the trade conflict between the US and

China. The Chinese economies slowed to 6.0% in Q3 2019, the weakest pace of growth

since 1992. Singapore and South Korea narrowly avoided the technical recession in

2019, given large contraction in exports. Even the domestic-oriented economy like

Indonesia also suffered from trade tension as country’s GDP growth has slowed to 5.0%

in 2019 and the market expects growth to remain at 5.0% in 2020. Malaysian, Thai, and

the Philippine economies also deteriorated both from external and domestic demand.

Meanwhile, domestic difficulty in India is likely to continue to drag economic growth of the

second-largest Asian economies going into 2020. In contrast, Vietnam has been one of

the main beneficiaries of the trade war as exporters relocated their export base from

China to Vietnam. The economy continued to expand at the rate above 7.0% for the

second year at 7.02% in 2019. This was above the government target of 6.6-6.8%.

Against these backdrops, the policymakers in Asian countries have continued to ease the

financial condition and to roll out more stimulus package in order to boost economic

growth. This would provide a favorable condition for the economy to remain quite resilient

as we move into 2020.

Fig 2: US policy uncertainty and risk recession abated, for now

0

50

100

150

200

250

300

350

0

5

10

15

20

25

30

35

40

45

50

2015 2016 2017 2018 2019

NY Fed Prob Recession

US Economic Policy Uncertainty (Baker, Bloom & Davis), RHS

UK referendumon Brexit

ChineseYuan devaluation

US-China trade tariffs

- US-China tradetariffs- Fear of US recession

Source: Bloomberg, and KBank

3

Expansionary policies in EM Asia help boost capacity for

growth

Monetary policy

• In China, the PBOC has announced its first Reserve requirement ratio cut in

2020 at 50bps to 12.50% for large banks and 10.50% for smaller ones and it

projected that the move would add another CNY 0.8 trillion of liquidity to the

markets. Given the accelerating pace of economic slowdown in China, we expect

the PBOC to implement further monetary policy easing going forward.

• India could cut the policy rate further given that the Reserve bank of India has

recently cut India’s GDP forecast for 2020 to 5% from 7.2%, previously.

Indonesia and the Philippines have lowered policy rates by 2 times last year (Fig.

4). The policy rates are likely to be kept stable at least for now as the Fed

Fig 3: Consensus growth outlook for Emerging Market and Developed market

0

1

2

3

4

5

6

7

8

9

10

2005 2007 2009 2011 2013 2015 2017 2019

Difference, 4M rolling Emerging Market

Developed economies

Source: CEIC, KBank

Fig 4: Policy rate in Asian central banks

Policy rate

Asia % % change (year-to-date) Latest move

India 5.15 -1.35 -25bp(Oct19) 5th

Indonesia 5.00 -1.00 -25bp(Oct19) 4th

Philippines 4.00 -0.75-25bp(Sep 19) 3rd

China 4.15 -0.16-5bp( Nov 19) 3rd

Malaysia 3.00 -0.25-25bp(May 19) 1st

Korea 1.25 -0.50 -25bp(Oct19) 2nd

Thailand 1.25 -0.50 -25bp(Nov19) 2nd

Policy moves

Source: Bloomberg, KBank

4

signaled to hold policy rate further. Plus, growth, inflation, and foreign exchange

in both economies have started to stabilize.

• In Malaysia, the market expects the BNM to deliver one more cut this year to

boost growth. Meanwhile, the Bank of Korea and Bank of Thailand faced limited

policy space to lower the policy rate further. But given below-potential growth

seen in both economies, the central banks signaled their readiness to lower

policy rates further, despite significant limitations.

Fiscal policy

• In China, we have so far seen the corporate tax cut worth CNY 2 trillion, an

additional boost to infrastructure spending by local government as well as the

speed-up process of the local government bond issuance. India has announced

USD 20 billion corporate income tax reduction, a USD 1.4 billion fund to salvage

stalled residential projects and a USD 7 billion stimulus for exporters. However,

given a large budget deficit in India, room for additional easing policy in India is

rather limited (Fig. 5).

• In Japan, despite contractionary fiscal policy through the scheduled consumption

tax increase in October, but in order to prevent the adverse effects to the

economy, the government has announced a stimulus package worth more than

JPY 26 trillion which was deemed to boost the economy by about 1.4ppt.

• South Korean economy has suffered the most from trade war, the government

proposed a record KRW 513.5 trillion (USD 431 billion) budget for 2020, a 9.3%

increase from this year’s main budget. In Indonesia, the slump in revenue is

pushing the budget deficit closer to the legal limit of 3% of GDP. The government

has committed to increase deficit target to 2.2% of GDP from 1.84%. The policy

includes structural and tax reforms to attract investment. Meanwhile, Singapore

has the largest fiscal room to support its economy. The IMF expects the fiscal

budget to be on a large surplus at 3.8% of GDP in 2020. Markets expect

Singaporean government to roll out several measures to boost growth in early

2020

• In Thailand, the government has stepped up a series of fiscal policies to boost

the economy which is on track for its slowest growth in five years. In late 2019,

Fig 5: Asian fiscal budget balance (% of GDP)

-7.2-6.3

-4.3

-2.6 -2.2 -1.8 -1.7-1.2

-0.8-0.2

1.5

3.8

-8

-6

-4

-2

0

2

4

6

Indi

a

Chi

na

Vie

tnam

Mal

aysi

a

Japa

n

Indo

nesi

a

Phi

lippi

nes

Tai

wan

Sou

th K

orea

Tha

iland

Hon

g K

ong

Sin

gapo

re

2019

2020

Source: CEIC, IMF, KBank

5

the cabinet passed a fresh round of stimulus that aims to spur more than THB

100 billion (USD 3.3 billion) of spending. That follows a USD 10 billion package in

August that included financial aids for farmers and low-income earners, as well

as initiatives to bolster consumer spending and investment. About one-third of

the package will come from the government budget.

• In contrast to other Asian economies, fiscal policy in Malaysia is constrained by

the already-large budget deficit and high public debt to GDP.

Trade sensitive currencies have started to show signs of

life

In 2019, we have seen Asian currencies moved in different directions (Fig. 1). The currencies whose economies are highly linked to exports to the US and China such as the Chinese yuan, Korean won, and Singaporean dollar had performed quite poorly compared to other regional currencies. Meanwhile, the more domestic-reliant economies such as the Philippine peso and the Indonesian Rupiah, in 2019, had recovered from the major backdrop saw in 2018. The Indian Rupiah weakened significantly as the economy suffered a major economic slowdown on the back of tightened credit conditions, financial sector difficulties, and adverse impact from domestic structural reform.

In Thailand, despite the economy also suffering from trade escalation between the US and China, weak domestic demand and investment had led the Thai current account to be on a large surplus, hence supporting the Thai baht to outperformed peers over the course of 2019.

In late 2019, as optimism from trade talks between the US and China grew, the trend of most affected currencies, especially the Korean won has started to reverse. Most of the Asian currencies have moved away from the year-low level (Fig. 6), except the Indian rupee. Markets have started to increase demand for assets in emerging market Asia, given the more positive outlook for Asian economies as the risk of trade war has started to fade. We have seen foreign portfolio inflows to Emerging Asian market excluding China recorded net inflows both in stock and bond markets over the last 4 months of the year (Fig. 7).

Fig 6: Asian currencies relative to year high/low

90

92

94

96

98

100

102

104

106

108

110

THB HKD IDR PHP SGD MYR JPY INR TWD CNY KRW

Year high

Year low

SPOT (3 Jan 2020)

Asian currencies (Index Jan 2019=100)

Stronger


6

On the asset return front, in 2019, the top gainers in emerging market Asia bonds are those high yielders, including the Philippines and Indonesia where positive and high returns came from both carry return and gain in foreign exchange (Fig. 8). In Thailand, gains from foreign exchange mainly contributed to the total return from investing in the government bonds. This year, as fiscal and monetary policy have remained accommodative and favorable for economies to grow, while risk surrounding trade tension between the US and China started to be less problematic, we expect the assets in South Korea, Singapore, and Taiwan to perform better somewhat.

Fig 7: Bond and Equity flows to Asia ex-China (USD million)

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

2017 2018 2019

Bond Equity

Bond and Equity flows to Asia ex China (USD million)


Fig 8: FX return versus total return from investing in Government bond

CN

HK

IN

ID

SG

MY

PH

KRTW

TH

JP0.0

5.0

10.0

15.0

20.0

25.0

-10.0 -5.0 0.0 5.0 10.0

Government bond (total return)

% to

talg

over

nmen

t bon

d re

turn

in 2

019

% FX return in Asia in 2019 (against US dollar)


7

Growth expectations for the Thai economy continue to decline as

almost all economic agents were either directly or indirectly impacted

by the US-China trade tariffs. Despite the easing of trade tensions

recently, most parts of the tariff remain in effect. The consequences to

the Thai economy will persist in 2020. In the long-run, the yield curve

likely flattens on structural issues of an aging society and technological

disruption, which will drag down the inflation expectations. Coupled

with low new supplies in this quarter, we suggest an increase in

duration in response to the expected flattening yield curve in the future.

However, bond switching programs, expected to begin during March-

April, will open a short-term trade opportunity by increasing exposure to

potential source bonds and selling expected destination bonds on day -

1 and close the position during day +5 to day +6. An estimated average

gain is 7 bps.

All Thai economic engines power down

The Thai economy is vulnerable to external shocks. Given the export share of 67% to

GDP and a degree of openness of 123%, this implies that more than half of Thai

revenues are directly pegged to global economic development. Sometimes, we could

guess the Thai economic growth number by looking at the world economic growth

forecast. And other economic agencies also have strong linkages to exports. Weak

global demands and the impacts of the US-China trade tariff squeezed Thai export

revenues. Given weak export orders, industries gave a pause on accumulating raw

materials and new investment projects. The employment, which is one of the production

factors, will also be impacted (Fig 1). The Bank of Thailand (BOT) decided to cut its

policy rate by 50 bps in 2019. And, in the Monetary Policy Committee meeting in

December, the committee also reduces its economic growth forecast for both 2019 and

2020 to 2.5% (from 2.8%) and 2.8% (from 3.3%), respectively.

Fig 1. Thai exports, Investment, and employment

-10

-5

0

5

10

15

20

-5.0

-3.0

-1.0

1.0

3.0

5.0

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

Jul-1

7

Jan-

18

Jul-1

8

Jan-

19

Jul-1

9

Export, investment, and employment

Private investment, %YoY, 6MMA Non-farm employment,6MMA %YoY

Export, 6MMA %YoY, RHS

Source: CEIC, KBank

Fixed Income Monitor: Lower growth potentials to keep

Thai yields flat

Kobsidthi Silpachai, CFA [email protected] Peerapan Suwannarat [email protected] Warunthorn Puthong [email protected] San Attarangsan [email protected]

8

All economic engines power down in 2020. Despite the US-China phase-one trade

deal to be signed soon, compliance to the deal and phase-two deal trade negotiations are

in our watch lists. And most parts of the US tariffs on Chinese goods remain in effect,

which continues to weaken Thai exports and production. We have seen that a direct

money injection to households with the aim of stimulating short-term consumption does

little to economic growth and production. Low growth projection has a muted upward

pressure on the long-term Thai government bond yields, hence flattens the yield curve.

The BOT had cut its policy rate twice to the historically low level in 2019. Policy space for

further easing has now become very limited. This might leave the BOT in a wait-and-see

mode. On a government front, with ample fiscal space given currently low public debt,

investment on long-term infrastructure projects such as logistics, water management, and

education could help relieve weak employments and enhance productivity. The latter is a

necessary condition for growth over the long term. The government disbursement after

an effect of the FY2020 Budget Act will be the key focus.

Fig 2. The TGB yield curve (%)

1.13 1.14 1.16 1.181.11

1.15 1.16 1.191.24

1.281.34

1.40 1.41

1.60

1.82

2.01

1.0

1.2

1.4

1.6

1.8

2.0

2.2

1m 3m 6m 1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 15y 20y 30y

%

tenor

3-Jan-20

30-Dec-19

30-Nov-19


S&P upgraded Thailand’s credit outlook

It seems to be quite contradictory that key credit rating agencies had upgraded Thailand’s

sovereign rating outlook this year while the economic growth is on a down cycle. The

most recent outlook upgrade Thailand is the S&P Global Ratings (S&P) in mid-December

from “stable” to “positive”. This reduced Thailand’s default risk premium for Thai bonds,

attracting capitals back to the country. In December, foreign flows recorded net buy for

the first time in 6 months at THB 1.371 billion. The market expected that the outlook

upgrade will be followed by the rating upgrade in 2020. However, we think that it might

not be the case as the policy implementation on long-term sustainable growth is among

the necessary conditions. We saw that the government budget disbursement for

investment contracted 2.6%YoY during January-November 2019. Also, the public

investment spending of THB 5.7 billion was the lowest in 6 years.

Structural challenges to lower LT inflation expectations

Thailand will enter an aging society in 2021. People tend to save more for their

retirement, which is compensated by squeezing their expenses. On the other

perspective, an aging society also means a shrinking labor force and increasing a

dependency ratio. One labor works for many dependents. In addition, technological

innovation is a key factor that reduces the cost of goods and increases price competition

in today’s digital age. Given all these factors, we expect that tepid inflationary pressure in

9

Thailand will keep the Thai government bond yields low. The BOT also accepts that

current subdued inflation is from structural issues and decided to cut its inflation target

from 1-4% to 1-3%, beginning this year.

Despite the muted inflation trend, the drought could spur domestic agricultural

prices in the near term. Looking at the two major dams in Thailand, both the Bhumibol

and Sirikit dam levels normally reach the highest level in November before falling in

winter and summer. However, this year, the dam levels hit its annual peak since

September and the peak dame level is the lowest in 4 years low, sending an alarming

sign that the drought will come sooner than usual. On the implication of inflation, the lack

of water will reduce the corp productions and increase agricultural prices. The long-term

yields are to rise to match with inflation expectations. However, we do not see a persisted

rise in yields as this inflationary pressure is driven by the supply shock. This indicates a

strategic time to accumulate bonds that respond to rising inflation and sell them with

better prices once the inflationary pressure fades.

Low supply amid pending Budget Act

The Public Debt Management Office (PDMO) disclosed the amount of bond to be

auctioned during January – March 2020 at a very low level of not-more-than THB 142

billion. This is even lower than the amount in October – December 2019 of THB 145

billion. The auction amount of bonds with a maturity of more-than-15 years declined in

response to lower expected demands (Fig 3). This will push the yields even lower given

usual excess demand in the Thai government bond market.

Fig 3. The outstanding value of the Thai government bonds (THB bn)

9869

40

91

259

177

26

206

51

198203

31

90

47

205

49

228

71

107

62

183

223

24

194

246

56

189211

5

150

620

96

140

179

9

166186

11125

15

0

50

100

150

200

250

300

206A

213A

214A

217A

21DA

226A

22NA

22DA

233A

236A

23DA

244A

24DA

24DB

25DA

267A

26DA

27DA

283A

283B

28DA

296A

29DA

316A

326A

356A

366A

37DA

383A

386A

396A

406A

416A

446A

466A

496A

616A

666A

676A

THB billions

Sectors

The outstanding amound of the Thai government bonds by sectors


Bond switching scheme opens a Short-term trade

opportunity

The PDMO plans to do bond switching programs with the size of THB 130 billion during

the rest of FY2020. The possible timing for the first program is March-April 2020 and the

PDMO could use this channel to increase long-term bond supply in the market amid

pending Budget Act.

Looking at the distribution of bond outstanding amount among sectors (Fig 4), we expect

source bonds to be LB21DA, LB22DA, and LB236A while potential destination bonds are

LB24DB, LB29DA, LB356A, and LB496A. Given this information, we observed the

behavior of the 2Y10Y yield spread during the 15 days before and after the

New auction in January

10

announcement of source bonds for the previous 5 bond switching programs during 2018-

2019. We found that the 2Y10Y yield spread on average jumped to almost 6 bps 5

working days after the source bond announcement. Meanwhile, the curve will be

flattened the most within 1 day before the announcement. This opens a short-term

opportunity to increase exposure in potential source bonds and sell expected destination

bonds on day -1 to close the position during day +5 to day +6. An estimated average gain

is 7 bps.

Fig 4. Potential source and destination bonds in FY2020 (THB bn)

98

69

40

259

177

26

206

51

198 203

31

90

47

205

49

228

71 62

183

223

24

194

246

56

189

5

150

6 20

96

140

179

9

166

186

111

-

50

100

150

200

250

300

LB

20

6A

LB

21

3A

LB

21

4A

LB

21

DA

LB

22

6A

LB

22

NA

LB

22

DA

LB

23

3A

LB

23

6A

LB

23

DA

LB

24

4A

LB

24

DB

LB

24

DA

LB

25

DA

LB

26

7A

LB

26

DA

LB

27

DA

LB

28

3A

LB

28

DA

LB

29

6A

LB

29

DA

LB

31

6A

LB

32

6A

LB

35

6A

LB

36

6A

LB

38

3A

LB

38

6A

LB

39

6A

LB

40

6A

LB

41

6A

LB

44

6A

LB

46

6A

LB

49

6A

LB

61

6A

LB

66

6A

LB

67

6A

THB bn TGB Outstanding

Expected source bonds

Expected destination bonds

Source: Bloomberg, KBank’s expectations

Fig 5. Changes in the 2Y10Y yield spread during bond switching programs

2.7

1.7 1.5 1.4 1.4

0.4 0.2

-1.0-0.4

0.10.6

1.3 1.4

0.6

-1.1

0.0

1.51.9

2.5

3.5

5.9 5.8

4.8

3.53.1

3.5 3.43.0

4.84.5

5.1

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

-15-14-13-12-11-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

bps

Day before and after date of announcing source bonds

Note: 1. Day 0 = the date that announces source bonds

2. The estimation includes 5 bond switching programs during 2018-2019.

Source: KBank

11

Thai government bond yield curves Thai government bond yield movements

1.13 1.14 1.16 1.181.11

1.15 1.16 1.191.24

1.281.34

1.40 1.41

1.60

1.82

2.01

1.0

1.2

1.4

1.6

1.8

2.0

2.2

1m 3m 6m 1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 15y 20y 30y

%

tenor

3-Jan-20

30-Dec-19

30-Nov-19

Source: Bloomberg, KBank Source: Bloomberg, KBank

Thai bond market trading Non-resident position in the Thai bond market

Unit: THB mn Oct-19 Nov-19 Dec-19 Jan-20 YTD

Average trading value 965,650 966,892 1,093,251 1,286,462 1,003,104

Asset Mgnt. Companies (TTM>1) 29,530 18,748 22,392 6,336 366,564

- Total flows -3,693 -6,006 1,371 3,136 -76,277

- Long-term (TTM>1) 2,266 -1,151 1,481 4,541 56,476

- Short-term (TTM<1) -5,939 -4,610 2,419 -816 -67,641

- Expired bond -20 -246 -2,530 -589 -65,112

-Foregin holding in GB (% share) 17.1 16.9 NA NA NA

-- ST holdings in Thai bonds 56,191 69,175 68,862 67,440 67,440

-- LT holdings in Thai bonds 862,098 842,435 848,069 852,381 852,381

Domestic investors

Foreign investors

Source: CEIC, KBank Source: CEIC, KBank

Government bond yield projections

Thai government bond yields

Unit: % 1Q20F 2Q20F 3Q20F 4Q20F 1Q21F 2Q21F 3Q21F 4Q21F

Thai central bank rate 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.50

2Y Thai government bond yield 1.43 1.41 1.44 1.45 1.45 1.43 1.41 1.57



US Treasury yields

Unit: % 1Q20F 2Q20F 3Q20F 4Q20F 1Q21F 2Q21F 3Q21F 4Q21F

Fed Funds rate (Upper bound) 1.75 1.50 1.50 1.50 1.50 1.50 1.75 1.75

2Y US Treasury yield 1.59 1.56 1.55 1.55 1.53 1.64 1.68 1.69

10Y US Treasury yield 1.69 1.66 1.70 1.75 1.94 1.99 1.94 1.93

Source: KBank as of 7 Jan 2020

Source: KBank as of 7 January 2020

12

Economic Update

November economic indicators reinforced broad-based weakening in

domestic and external demand

Thai economy is expected to face several challenges in 2020

2020 may be a most difficult and unpredictable year amid the perfect

storm of geopolitical risk

Units: %YoY, or indicated otherwise 2018 2Q-19 3Q-19 Sep-19 Oct-19 Nov-19 Dec-19 YTD- 2019

Private Consumption Index (PCI) 3.1 2.5 1.4 0.3 2.1 2.4

-6.0

· Non-durables Index 1.4 3.3 1.8 0.7 3.3 1.6

-6.3

· Durables Index 8.4 0.1 -3.1 -5.7 -4.8 -9.1

-10.7

· Service Index 5.2 2.2 2.6 2.0 4.5 3.2

-6.1

· Passenger Car Sales 19.2 1.9 -6.4 -8.9 -10.4 -17.1

-8.9

· Motorcycle Sales -1.3 -6.1 -0.3 -6.8 1.5 -2.8

-10.2

Private Investment Index (PII) 3.5 -3.3 -3.4 -2.9 -4.7 -6.1

-3.0

· Construction Material Sales Index 4.5 2.4 -3.8 -1.9 -4.0 -5.3

-1.1

· Domestic Machinery Sales at constant prices 5.9 -5.3 -6.8 -5.0 -8.2 -6.9

-5.0

· Imports of Capital Goods at constant prices 3.7 -2.1 -1.3 -2.6 -4.2 -7.6

-1.4

· Newly Registered Motor Vehicles for Investment

5.7 -1.8 -2.5 -3.8 -6.0 -15.5

-1.3

Manufacturing Production Index 3.6 -2.5 -4.3 -5.1 -8.1 -8.3

0.0

· Capacity Utilization 68.8 67.5 65.9 63.8 63.0 63.2

68.2

Agriculture Production Index 6.5 -2.4 1.1 1.5 0.4 -2.7

0.7

· Agriculture Price Index -5.7 2.1 2.4 2.2 -0.1 5.4

1.4

No. of Tourists 7.5 1.4 7.2 10.1 12.5 5.9

4.4

Exports (Custom basis) 6.9 -3.8 -0.5 -1.4 -4.5 -7.4

-2.8

Price 3.4 0.2 0.4 0.3 -0.2 0.3

0.3

Volume 3.4 -3.9 -0.9 -1.7 -4.3 -7.7

-3.0

Imports (Custom basis) 12.0 -3.6 -3.1 -4.2 -7.6 -13.8

-5.2

Price 5.6 -0.1 -0.2 -0.6 -1.4 1.3

0.0

Volume 6.1 -3.5 -5.9 -3.6 -6.3 -14.9

-5.2

Trade Balance ($ millions) (Custom basis) 3.25 1.94 1.76 1.28 0.51 0.55

9.0

Current Account ($ millions) 28.46 5.07 9.13 3.53 2.91 3.38 33.2

Broad Money 5.1 3.7 4.3 4.7 4.4 4.4

4.2

Headline CPI 0.66 1.08 0.61 0.32 0.11 0.21 0.87 0.71

USD/THB (Reference Rate) 32.3 31.6 30.7 30.6 30.4 30.2 30.2 31.0

Sources: BOT, MOC, OAE, and OIE

Macro Department, KResearch [email protected]

13

Thailand Economic Update

November economic indicators reinforced broad-based weakening in domestic and

external demand, which indicated downside risks toward Q4/19 growth. Almost all

economic indicators pointed to deterioration in activities, except tourism sector.

Manufacturing production posed a sharp drop due partly to temporary shutdown in

refineries. Meanwhile, the growth in PCI was rather tepid and saw weakness signs in

major components. Investment remained in the doldrums amid both internal and

external headwinds. Also, government spending remained a drag due to a delay in the

enactment of the FY2020 Budget Act, which restricted budgetary disbursement for new

investment projects.

Going forward, Thai economy is expected to face several challenges in 2020. The

strong baht, weak global demand, higher oil prices and uncertainties in trade outlook

might have negative impacts toward economic performance.

Fig 1. Key economic indicators

Source: BOT, OAE, KResearch

The Private Consumption Index (PCI) inched up in November, bolstered by the

government stimuli. It grew 2.4% YoY against 2.1% YoY in October 2019. Overall,

domestic consumption remained rather weak. Consumption in non-durable goods and

services were rather bleak amid grim consumer confidence. Meanwhile, consumption of

durable good contracted at a faster pace due to dismal sales in motorcycle and vehicle

and tightening credit standard from financial institutions.

The Private Investment Index (PII) contracted 6.1% YoY in November. Overall, the

investment gauge showed a broad-based deterioration of investment activities. The

import volume of capital goods drops at -11.2 %YoY amid dismal exports performance.

Meanwhile, demand for construction materials has declined substantially, alongside

declining domestic demand amid various negative factors.

The number of foreign tourist arrivals to Thailand expanded 5.9% YoY, led by

Chinese tourists. The number of Chinese visitors rose 18% YoY due to the visa on

arrival fee waiver, Hong Kong protests and the low base effect. Also, the number of

inbound tourists from Asia and Russia showed signs of recovery.

Government spending contracted 22.6% YoY in November due to the delay in the

enactment of the FY2020 Budget Act. The investment budget dropped dramatically by

66.8% YoY in November 2020. Meanwhile, disbursement of regular budget declined

17.9% due to restrictions over temporary budget process. A sharp decline in

14

disbursement was attributed to a delay in FY2020 Budget Act, which unsigned contracts

cannot be disbursed.

On the external front, November exports fell 7.4% YoY due partly to a temporary

shutdown in refineries. A sharp decline of 44.8% in refined oil and a 29.1% drop in

chemical export came from a shutdown of some refineries during maintenance tasks.

Meanwhile, weak global demand caused a 14.2% fall in agricultural products. However, a

smaller decline in exports of electronics offered a glimpse of hope; thanks to an

improvement in global trade sentiment. In terms of export destinations, exports to China,

and Middle East showed an expansion. However, other major destinations remained in

contraction territory.

Headline inflation rose 0.87% YoY in December and finished the 2019 at 0.71%. A

low base effect in energy prices and a rise in some food-related items were attributed to a

surge in overall headline CPI. However, CPI showed a contract picture. It remained rather

bleak growth of 0.49% in December and rose only 0.52% in 2019. The benign core

inflation is consistent with a slowdown in overall economy.

Global Economic Update

Geopolitical risks on the rise in 2020

Global economy is on the edge of the abyss. The latest flare-up in U.S.-Iran relations

could bring about the end of the longest growth cycle as surging crude prices will slow an

already fragile global economy down even further. The killing of Iranian general in

Baghdad could have drastic consequences around the world. The incident is likely to

further worsen relations between Iran and the US as Iran vowed harsh retaliation. Initially,

crude prices soared by as much as 4% after the event, the highest level since Sep 17,

2019 following missile and drone attacks against Saudi oil installations. However, the real

impact of the event depends on “how Iran will respond to the US assassination of

General Soleimani”.

Iran would use network of proxies such as Hezbollah, an Iran-backed terrorist

group in Lebanon or Houthis rebels in Yemen to attack the key US allies in the

region. Any miscalculations could lead to a real war between the US and Iran, but

the world war III is unlikely to happen at this point. A blockade of oil tanker traveling

through the Strait of Hormuz or target and murder American troops and diplomats in

the region could cross the US red line. This could escalate the situation out of control

and a full scale war between the US and Iran may happen. However, the possibiliy that

the world war III would happen is rather quite low. The EU wants to avoid another wave

of millions refugees. China depends heavily on imported energy from the regions.

Meanwhile, Russia enjoys maintaining a good tie with the Islamic Republic. Therefore,

the UN Security Council will not take action to start a war without a very good reason

from the US.

A tepid growth is here to stay in 2020

In 2020, we do not foresee a significant reversal of global growth activities, even

though some risk factor has eased since late 2019. The world economy is fragile amid

a record high of debts. The global debt is growing faster than the economic growth,

especially in the US and China. The level of corporate debt rose more than 60% in the

US and more than double in China in the last decade. Going forward, the anemic

economic growth in 2020 will make the debt situation worse.

https://www.washingtonpost.com/outlook/this-is-how-easily-the-us-and-iran-could-blunder-into-war/2019/05/23/40dbbcae-7c07-11e9-8ede-f4abf521ef17_story.html?utm_term=.5b9c990261b7

15

The trade war is far from over, even though both countries could reach the first

phrase of a skinny trade deal. The US and China is expected to sign of phrase 1

trade deal in January 2020. This gives a collective sigh of relief that the US and China

could avoid a full-blown trade war. However, this skinny trade deal largely omits seven

key issues which the US wants to fullfill before it is willing to remove the tariffs.

Therefore, the next round of trade talks would have a high bar to achieve. Given limited

or little chances that both countries could break though trade disputes into the next

phrase, repercussions from postponed investments and declines in productions will not

go away. Global economy still face risk of decouping of the supply chain, if the trade

war re-escalates.

In addition to the US-China trade war, the ongoing trade fights with Europe is on

the crossroad. Spats over US tariffs on European steel, US tariffs on European goods

due to the Airbus-Boeing dispute, and US tariffs on French goods in response to a

controversial French digital tax remain the elephant in the room. If the US starts to slap

tariffs on these items, the next round of European retaliatory tariffs is in the pipeline.

In emerging economies, the growth has slowed much more sharply amid trade

uncertainties. Their economy was doubled down by weak export demand and rise of

debt too. This implies that global economy may lose engine of growth.

Secular stagflation risk is rising. Overall, one of the main supports for global growth

in 2020 comes from the wave of synchronised monetary easing. Unfortunately, the

room for further easing in 2020 is rather limited. Many central banks are facing the

limitation of monetary policy and exploring new tools such as helicoptor money to

prevent against the next economic downturn. Meanwhile, many counties that need

fiscal stimulate growth have very limited fiscal space.

16

We studied the Thai equity market’s performance in the first

quarter of each year since the global financial crisis in 2008 and

found that the SET Index had yielded a positive return for 10

consecutive years with an average return of 6%.

The performance of each 1Q from the start of each year has varied.

Although if we take as our starting point a low level after a market

consolidation or sell-off in the previous year, the 1Q performance of

the SET Index is substantially higher (i.e. 1Q09, 1Q12, 1Q16 and

1Q19).

We found a dividend capture strategy produced a result that was on

par with or which outperformed the SET Index in 1Q in the past five

years. The SETHD index yielded an average return of 7% vs. the

SET Index’s 4% in 1Q in the past five years. Note that the SETHD

index composes 30 high-dividend stocks selected by the SET every

half year.

Implication

We expect that history may repeat itself in 1Q20 due to a number of supporting factors;

o The US and China are expected to sign Phase I of their trade deal during Jan. 21-24,

2020.

o We expect the Thai House of Representative will pass the 2nd

and 3rd

readings of the

budget bill by the end of January 2020.

o Given the weak 4Q19 and 2020 GDP outlooks, we expect the Bank of Thailand and

the government to roll out more stimulus packages to defend the country’s 2020

growth target of 2.5-3%.

o We do not expect the no-confidence debate in January 2020 to break the government

coalition given it has enough support from the public. Note that the Palang Pracharath

Party (PPRP) dethroned Pheu Thai to win a seat in a by-election in Khon

Kaen province last Sunday.

o No selling pressure from LTF outflows in 1Q20 (usually -Bt10bn in 1Q) as the length

of time to hold LTF units to obtain tax benefits was increased from 5 to 7 years from

2016.

o The SET Index has dropped 10% since 2018 and we expect a rebound in 1Q20 given

the low starting level.

We recommend investors use a “Buy in January and Sell in April” strategy for the

Thai market in 1Q20 on expectation it will yield a positive return.

Investors may use the dividend capture strategy by selecting high-divided stocks

from the SETHD universe (see Fig 4) and selling them by end-1Q20 before the

XD date.

Our recommended high-dividend stocks are TISCO, SCB, ORI, AP, MAJOR, QH,

LH, ADVANC, INTUCH, KCE, HANA, PTTGC and BCP.

Equity market monitor: Expect a positive return from SET

in 1Q20

Equity Research Team

17

Fig 1 Key events in 1Q20

Fig 2 SET index vs. SETHD index

Key events When Impact

No confidence debate 13-Jan-20 +/-

US China trade deal (I) 21-24 Jan 2020 +

Budget bill passed 2nd-3rd reading Jan-20 +

MPC meeting 5-Feb-20 +/-

4Q19 GDP 19-Feb-20 +/-

MPC meeting 25-Mar-20 +/-

UK Brexit deadline 31-Mar-20 +/-

0

200

400

600

800

1000

1200

1400

1600

1800

2000

July-11 July-12 July-13 July-14 July-15 July-16 July-17 July-18 July-19

SET Index SETHD Index

Source: KS Source: SET, Bloomberg, KS

Fig 3 Return of SET vs. SETHD in 1Q

17%

12%

6%

1%

9%

2%1%

5%

13%

3% 2%

1%

13%

9%

6%

5%

1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19

SET Index SETHD

Source: KS

Fig 4 Expected DPS and dividend yields of SETHD stocks under KS’s coverage (ranked by dividend yield in 1H20)

Company KS Sector Price (Bt) KS Rating Upcoming Operation Estimate

24-Dec-19 DPS XD date Payment Yield Period / Official C o nsensus C o nsensus

(Bt) ▼ date (%) 2019E 2020E 2019E 2019E 2020E 2019E

SIRI Residential 1.07 Neutral 0.10 Mar-20 May-20 9.8% Jul-Dec19 Estimate 0.12 0.11 0.09 12% 10% 9%

TISCO Banking 97.75 Outperform 7.01 Apr-20 May-20 7.2% Jan-Dec19 Estimate 7.01 7.38 7.14 7% 8% 7%

TCAP Banking 57.25 Neutral 4.00 27-Dec-19 Jan-20 7.0% Special Official 2.60 2.60 3.78 5% 5% 7%

ORI Residential 6.80 Outperform 0.36 May-20 May-20 5.3% Jul-Dec19 Estimate 0.57 0.58 0.48 8% 9% 7%

KKP Banking 65.50 Neutral 3.27 Apr-20 May-20 5.0% Jul-Dec19 Estimate 4.77 4.64 4.67 7% 7% 7%

AP Residential 6.90 Outperform 0.34 May-20 May-20 4.9% Jan-Dec19 Estimate 0.34 0.40 0.35 5% 6% 5%

KTB Banking 16.20 Neutral 0.79 Apr-20 May-20 4.9% Jan-Dec19 Estimate 0.79 0.81 0.78 5% 5% 5%

QH Residential 2.58 Outperform 0.12 Apr-20 May-20 4.5% Jul-Dec19 Estimate 0.19 0.20 0.18 7% 8% 7%

LH Residential 9.70 Outperform 0.43 May-20 May-20 4.4% Jul-Dec19 Estimate 0.73 0.61 0.67 7% 6% 7%

SCB Banking 118.50 Outperform 4.00 Apr-20 May-20 3.4% Jul-Dec19 Estimate 5.50 5.50 6.00 5% 5% 5%

IRPC Petrochemical 3.72 Neutral 0.10 Feb-20 Apr-20 2.7% Jan-Dec19 Estimate 0.10 0.10 0.09 3% 3% 2%

MAJOR Media & Publishing 25.00 Outperform 0.67 Apr-20 May-20 2.7% Jul-Dec19 Estimate 1.32 1.45 1.23 5% 6% 5%

INTUCH ICT 57.75 Outperform 1.49 Feb-20 Apr-20 2.6% Jul-Dec19 Estimate 2.84 3.22 2.79 5% 6% 5%

BEAUTY Commerce 1.70 Neutral 0.04 May-20 May-20 2.3% Jul-Dec19 Estimate 0.07 0.08 0.15 4% 5% 9%

RATCH Utilities 69.00 Neutral 1.48 Mar-20 Apr-20 2.1% Jul-Dec19 Estimate 2.63 2.77 2.60 4% 4% 4%

KCE Electronics 23.20 Outperform 0.50 Mar-20 May-20 2.2% Jul-Dec19 Estimate 0.90 1.10 0.62 4% 5% 3%

HANA Electronics 33.75 Outperform 0.65 Mar-20 May-20 1.9% Jul-Dec19 Estimate 1.30 1.50 1.40 4% 4% 4%

SCC Construction Materials 390.00 Neutral 7.00 Apr-20 Apr-20 1.8% Jul-Dec19 Estimate 14.00 14.00 14.62 4% 4% 4%

PTTGC Petrochemical 56.75 Outperform 1.00 Mar-20 Apr-20 1.8% Jul-Dec19 Estimate 2.00 2.00 1.95 4% 4% 3%

ADVANC ICT 215.00 Outperform 3.46 Feb-20 Apr-20 1.6% Jul-Dec19 Estimate 7.24 10.11 7.69 3% 5% 4%

PTT Energy 44.25 Outperform 0.70 Mar-20 Apr-20 1.6% Jul-Dec19 Estimate 1.60 1.80 1.83 4% 4% 4%

TOP Energy 69.50 Neutral 1.00 Feb-20 Apr-20 1.4% Jul-Dec19 Estimate 2.00 2.25 1.87 3% 3% 3%

BCP Energy 27.00 Outperform 0.23 Mar-20 Apr-20 0.9% Jul-Dec19 Estimate 0.73 1.27 0.93 3% 5% 3%

JMT Small-Mid Cap 19.40 Outperform 0.13 Apr-20 May-20 0.7% Jul-Dec19 Estimate 0.38 0.48 0.48 2% 2% 2%

SPRC Energy 10.40 Neutral - - - 0.0% Jul-Dec19 Estimate 0.12 0.39 0.15 1% 4% 1%

KS KS

Dividend expected next period DPS (Bt) Annual Yield (%)

Hunting Yields from SETHD

Source: KS

18

KBank THB NEER Index

USD/THB vs DXY Index

95

100

105

110

115

120

125

130

135

95

100

105

110

115

120

125

130

135

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

KBank NEER,base = Jan 1995, left

est.

Latest data point, left

BOT NEER, base = 2012, right

128.53

88

90

92

94

96

98

100

102

104

29

30

31

32

33

34

35

36

37

Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19

USD/THB DXY Index, RHS


Thailand’s GDP

Thai inflation parameters

4.24.5

4.0

5.04.7

3.23.6

2.8

2.3 2.4

1.3 1.3

0.4

1.9

1.0

0.0

0.81.0

0.40.1

0

1

2

3

4

5

6

2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19

GDP (%YoY) GDP (%QoQ sa)

-2

-1

0

1

2

3

4

5

11 12 13 14 15 16 17 18 19

Headline Inflation Core Inflation

Upper Bound Policy Target Lower Bound Policy Target

Source: NESDB, KBank Source: Bloomberg, KBank

Implied forward curve: TGBs

Implied forward curve: USTs

1.131.14

1.16

1.101.14 1.14 1.16

1.211.25

1.301.34 1.36

1.000.991.01

1.091.12

1.15

1.221.26

1.411.37 1.36

1.45

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

0 1 2 3 4 5 6 7 8 9 10

06/01/2020

next 3 months

next 6 months

next 12 months

tenor, yrs

1.551.56

1.61

1.73

1.81

1.551.57

1.70

1.79

1.92

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

0 1 2 3 4 5 6 7 8 9 10

07/01/2020next 3 monthsnext 6 monthsnext 12 months tenor, yrs


Foreign holding of Thai fixed income and stock

Foreign net buy/sell in Thai markets (USD bn)

603 629

841

72

-412

-600

-400

-200

0

200

400

600

800

1,000

10 11 12 13 14 15 16 17 18 19 20

Thai government bonds, THB bn BOT bonds Thai stocks, est since 1999

-2.9

-7.4-2.7 -5.1

-17.8

18.9

72.5

-25.1-32.1

-10.4

-3.7 -5.8

-38.2

-0.3

6.7

-3.4

-16.4

3.4 3.7

46.7

20.1

-54.3

-11.7-7.8 -7.7

-44.8-60

-40

-20

0

20

40

60

80

Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19

Net buy bond Net buy equity

Source: Bloomberg, ThaiBMA, KBank Source: Bloomberg, KBank

19

Key Parameters & Forecasts at Year-end

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E

GDP, %YoY 0.8 7.2 2.7 1.0 3.1 3.4 4.0 4.1 2.5* 2.7

Consumption, %YoY 1.8 6.7 0.9 0.8 2.3 2.9 3.0 4.6 4.5* 3.9

Government Spending, %YoY 3.7 7.2 1.5 2.8 2.5 2.2 0.1 1.8 2.2* 2.3

Private Investment, %YoY 3.7 7.2 1.5 2.8 2.5 2.2 0.1 2.6 2.9* 3.0

Public Investment, %YoY 14.7 11.6 6.0 -2.0 -2.7 -1.0 0.5 6.6 0.9* 6.9

Export (USD term), %YoY 15.1 2.9 -0.3 -0.5 -5.8 0.5 9.9 6.9 -2.5* -1.0

Import (USD term), %YoY 25.1 8.9 0.5 -9.1 -11.0 -4.2 14.1 12.0 -5* 0.0

Current Account (USD bn) 9.4 -4.9 -8.8 11.6 27.8 43.4 44.1 32.4 34.5* 33.8

CPI, %YoY, average 3.81 3.02 2.19 1.9 -0.9 0.19 0.67 1.06 0.7 0.7

Fed Funds, %year-end 0.0-0.25 0.0-0.25 0.0-0.25 0.0-0.25 0.25-0.50 0.50-0.75 1.25-1.50 2.25-2.50 1.50-1.75 1.25-1.50

BOT Repo, %year-end 3.25 2.75 2.25 2.00 1.50 1.50 1.50 1.75 1.25 1.25

Bond Yields

2yr, % year-end 3.09 2.89 2.56 2.10 1.49 1.60 1.46 1.75 1.16 1.45

5yr, % year-end 3.16 3.15 3.41 2.48 1.95 2.26 1.85 2.14 1.24 1.61

10yr, % year-end 3.29 3.51 3.90 2.72 2.50 2.65 2.32 2.48 1.47 1.79

USD/THB 31.56 30.61 32.87 32.90 36.08 35.80 32.58 32.55 30.15 29.25

USD/JPY 76.91 85.96 105.17 119.48 120.22 116.96 112.69 110.27 109.44 107.00

EUR/USD 1.30 1.32 1.37 1.22 1.09 1.05 1.20 1.14 1.12 1.12

SET Index 1025 1392 1299 1498 1288 1543 1754 1564 1578 1725**

* KBank's Forecast

** denotes 12-month forward

Source: Bloomberg, KSecurities, KResearch, KBank

20

Disclaimer

“This document is intended to provide material information relating to investment or product in discussion and for reference during discussion, presentation or seminar only. It does not represent or constitute an advice, offer, contract, recommendation or solicitation and should not be relied on as such. In preparation of this document, KASIKORNBANK Public Company Limited (“KBank”) has made several crucial assumptions and relied heavily on the financial and other information made available from public sources, and thus KBank assumes no responsibility and makes no representations with respect to accuracy and/or completeness of the information described herein. Before making your own independent decision to invest or enter into transaction, the recipient of the information (the "Recipient") shall review information relating to service or products of KBank including economic and market situation and other factors pertaining to the transaction as posted in KBank’s website at URL http://www.kasikornbankgroup.com and in other websites including to review all other information, documents prepared by other institutions and consult financial, legal or tax advisors each time. The Recipient understands and acknowledges that the investment or execution of the transaction is the transaction with low liquidity and that KBank shall assume no liability for any loss or damage incurred by the Recipient arising out of such investment or execution of the transaction. Each Recipient including its employee or officer who receives this document or a copy of the document represents and agrees not to reproduce, distribute or provide it in whole or in part to any other person and agrees to keep confidential all information contained therein. In the case of derivative products, where the Recipient provides incomplete or inaccurate information to KBank, KBank may not be capable of delivering information relating to investment or derivative products appropriate to the genuine need of the Recipient. The Recipient also acknowledges and understands that the information so provided by KBank does not represent the expected yield or consideration to be received by the Recipient arising out of the execution of the transaction. Further the Recipient should be aware that the transaction can be highly risky as the markets are unpredictable and there may be inadequate regulations and safeguards available to the Recipient. The Recipient acknowledges that there may be conflict of interest under the KBank’s services, whether directly or indirectly and should further consider the character, risk and investment return of each KBank’s product by reading details from relevant documents provided by KBank. KBank reserves the rights to amend either in whole or in part of information so provided herein at any time as it deems fit and the Recipient acknowledges and agrees with such amendment. Where there is any inquiry, the Recipient may seek further information from KBank or in case of making complaint; the Recipient can contact KBank at (662) 888-8822.”

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