Meaningful Words

Good morning,
 Written on Mar 20, 2014

You all know what Yellen last night has signaled global financial markets. To me, only three words that are so meaningful: “around six months.”  

Yes, the $10 billion reduction has come as expected, bringing the monthly bond purchases to $55 billion a month starting April. The Fed has said it would continue to taper by $10 billion a month unless its outlook for the economy changed substantially. So, it means the taper is on course to end in Oct or Nov this year. The point is six months after that (April or May 2015), the first rate hike could come, and that would mean excess liquidity across the globe, especially in emerging markets, will be repatriated to the US. Earlier, the market had been expecting the first rate hike to come toward the end of 2015, perhaps in Oct or Dec. This is the key from the FOMC meeting this time. Be prepared.

Politics -- Ruling this Friday

The Constitutional Court will judge tomorrow whether the 2 Feb poll is illegitimate. I think there are three scenarios which have different impact on stocks. First, the court nullifies the Feb 2 election and paves the way for a non-elected government (negative). Second, the court annuls the Feb 2 election, and then the Election Commission sets the new election date with the Democrat party participating (positive). Third, the court rules the Feb 2 election constitutional, and the Election Commission goes ahead with elections in the rest 28 constituencies where there were no candidates (neutral).

Mkt Strategy -- Which cases will you choose?

Our base-case target PER peg for YE14 is 14x (2014E), implying a SET level of 1433, which is 0.5SD above the SET’s long-term mean of 12x. EPS forecast is 102 which is 3.1% below the consensus number. The GDP projection for this year is 2.9%, assuming that the political problems end by mid-year.

Under our bear-case scenario, 2014 GDP could fall to 2% and EPS could be slashed to 97. Failure to resolve ongoing political problems and weaker global growth momentum could lead to this case. The market PER could be pushed down to 11.5-12x, implying a SET level of 1115-1164.

Under our bull-case scenario, we see only limited upside to GDP (3.5%) and EPS (108), as the macro drivers would engage in 2H14 rather than early in the year. The SET PER, however, could rise to 15x toward year-end (implying a minimum index of 1650) on expectations of even stronger prospects for 2015.