3 More Cliffs to Come‏

Good morning,
Written on Jan 3, 2013

  
For at least the first day of trading, 2013 is providing to be a very good year. Asian stocks including Thailand post strong gains, whilst government bonds in weaker eurozone economies rally as investor appetite for riskier assets rise on the diminished threat of an instant hit to growth in the world’s biggest economy. Nonetheless, while the agreement provides some short-term certainty, it leaves a range of huge issues unaddressed. Here is what’s still ahead:

• Debt Ceiling: Congress has to raise the debt ceiling soon. Real soon. (Deadline: Late Feb or early Mar)
• Sequester: The so-called sequester is a series of automatic cuts in federal spending that will reduce the budgets of most agencies and programs by 8% to 10%.(Deadline: Bill will postpone many of the Jan 2 cuts by two months.)
• Continuing Budget Resolution: The federal government works on a fiscal year that starts every Oct 1. Problem is it has been years since it actually enacted a real budget on time. (Deadline: The current continuing resolution expires on Mar 27.)

Bank of Thailand governor Prasarn also joined analysts in expressing skepticism over legislation approved by the US Congress yesterday. “The US still faces the challenge of coming up with meaningful reforms in the long run. We need to follow the outcome over the next three months to assess the economic impact,” he said.

Market view: I think, for long-term prospect, the SET could eventually climb to 1433 and then 1505 supported by internal and external factors in particular the current government policies, i.e. a cut in corporate income tax, a new personal income tax regime, or the 300-baht daily minimum wage. However, for short-term starting next week, we might encounter selling demand from long-term equity fund (LTF) holders for units bought in 2009 when the SET was around 680 points, which will normally be worth about 25-30 billion baht, and that could hurt the 18.25P/E market till the end of this month. Hence, my strategy is to wait and be prompt to rebuy once the market corrects. Otherwise, just go with the trend.