Stock markets plunged in Thailand and around the globe on Thursday as investors panicked over the possibility of interest rates rising after US inflation surged 4% in April, exceeding targets.
High inflation in the US may cause the Federal Reserve to taper quantitative easing (QE) and increase interest rates, causing overall liquidity in the markets to decrease.
Therdsak Thaveeteeratham, executive vice-president of Asia Plus Securities, said the US economy has significantly improved as the Fed reported the Consumer Price Index gained 4.2% in April from a year earlier, signalling that the central bank may decide to raise interest rates faster than expected.
Inflation of over 2% is typically considered a relatively high rate.
The central bank may have to adjust its monetary policy to curb inflation, including tapering QE faster than anticipated, he said.
Tapering QE would reduce liquidity in the economy, driving investors to adjust their investments in risky assets, meaning funds may flow out of the stock market in the short term.
In addition, a rising inflation rate will drive commodity prices to increase, especially energy and oil prices.
In the short term, the Thai stock market is expected to adjust in line with global markets, said Mr Therdsak.
However, the Stock Exchange of Thailand (SET) is expected to benefit from rising commodity prices because it has a considerable amount of energy stocks, which should post a good performance this quarter.
He said Thai investors still remember the negative image of QE tapering from the past when foreign investors accounted for up to 30% of the total Thai market cap.
In the past, losing foreign investors would have a big impact on the SET index, but now foreign investors account for about 20%, lessening the effect.
Some 55% of Thai listed firms reported profits of 180 billion baht in the first quarter of 2021.
By tomorrow, the profits should exceed 200 billion baht, beating forecasts, said Mr Therdsak.
Sorrabhol Virameeteekul, senior vice-president at Kasikorn Securities (KS), said the rise in inflation will not affect the earnings of listed companies, but it is still downgrading the market's price-to-earnings (P/E) ratio from 20 to approximately 18.
Based on the statistics, the stock market should have a P/E of 20 if the inflation rate is in a range of 1-3%.
Sunthorn Thongthip, a strategist at KS, said the market expects the Fed will not raise interest rates for about two years, while QE tapering will happen faster if the economy recovers.
According to a Bloomberg consensus, the fastest QE tapering will happen is the end of this year.
Maybank Kim Eng Securities stated the US inflation rate exceeded the forecast for April, increasing the likelihood of faster QE tapering, which is a factor depressing the Thai stock market.
Factors to monitor are the US unemployment rate and the pandemic situation, said the brokerage.
A source in the investment industry who requested anonymity said investors must be cautious and monitor the news regarding market movements because there is lots of fake news.
The Thai stock market slumped by about 70 points at around 4pm on Thursday before rebounding to -23.72 points, down 1.51% from the previous day to close at 1,548.13 points in trade worth 143.71 billion baht.