Results-led rebound likely

Results-led rebound likely

Global stock markets sold off in October, led by emerging markets as expected. Investor concerns about trade and geopolitical conflicts, the Italian budget showdown with the EU, and third-quarter results of major technology stocks put more pressure on global equities.

The Thai market also corrected but outperformed most other global equity gauges, developed and otherwise, thanks to strong buying interest from local investors. The SET declined 6.8% in October, but the MSCI Emerging Markets gauge lost 10.8%.

The US dollar appreciated as strong US economic numbers led to expectations of more aggressive interest-rate increases by the Federal Reserve. Gold outperformed other risk assets as investors sought a safe haven in the short term. Oil prices dipped as Opec agreed to increase production capacity to offset supply shortfalls from Iran and Venezuela.

Third-quarter results, so far, have beaten expectations for most markets. This may lead to earnings upgrades for year-end 2018 and add some positive momentum to global equity markets.

We believe the correction in stocks is a short-term story. For the long term, the recent correction offers an opportunity to accumulate stocks that offer potential for growth at discounted prices. The consensus projection for global earnings per share (EPS) growth in 2019 of around 10% remains firm.

In addition, global stock markets are trading at a discount to the five-year historical average. Europe, Japan and China in particular offer attractive valuations with decent growth expectations.

At a time when interest rates are trending upward, we foresee foreign-exchange risk in emerging-market currencies and bonds. We prefer short-duration bonds over long durations, and we recommend that all positions be hedged, owing to the prospect of dollar appreciation.

We still believe that developed equity markets such as the US, euro zone and Japan will not be affected much by a trade war and sell-offs linked to forex depreciation. In terms of sectors, technology still attracts us in terms of long-term growth potential.

For the Thai market, we maintain our neutral view. Third-quarter results should support our 2018 EPS forecast, but a slowdown in tourist arrivals and a pullback in exports will discourage investor sentiment in the short term. A SET index below 1,600 points would trigger buying interest of long-term equity funds for tax purposes and support the Thai market.

In the next few weeks, investors should keep an eye on the US midterm elections on Tuesday, the G20 summit in Argentina on Nov 30, and third-quarter results of technology stocks.

In the US elections, if the Democrats win back a majority in the House of Representatives, it could be a turning point for emerging markets and also a negative factor for the US market if legislators block some of President Trump’s policies.

Trade tensions might ease when the G20 leaders meet, which would affect economic fundamentals through 2019.

In addition, third-quarter results, which have so far beaten market expectations, may restore investor confidence and encourage some to seek capital gains towards year-end after the market correction of September and October.

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