Foreign investors are rekindling their enthusiasm for Thai stocks, lured by cheap valuations and a belief that the worst of the country's economic woes this year may be over. Overseas funds' brisk buying helped Thailand's benchmark SET Index to burst past key psychological resistance at 700 points at the beginning of the month after five failed attempts since April. Foreign investors were net buyers of 17.5 billion baht ($3.3 billion) in Thai stocks in the first 24 days of August alone, said Kim Eng Securities. The Thai stock market could be just getting started on a firm uptrend again, some analysts believe, after a long period of disappointment since it soared to a post-financial crisis peak of 800 points in late 2003. Merrill Lynch is among the bulls setting a 12-month index target of 880. It closed on Friday at 712.78. 'We sense that there is considerable absolute and relative upside to the SET,' said Merrill's regional strategist Spencer White who last week upgraded Thailand to an overweight in his model regional portfolio. 'After a slew of bad news in the first half, the outlook for growth is improving.' There are plenty of cautious words amid the optimism. Macquarie Research fears that other investment banks have still not fully factored in the slowdown in consumer spending into their earnings forecasts and it could hurt market sentiment when they do. Kim Eng said it had a year-end target of 750 points, 'but this could prove too optimistic if oil prices stay at their current lofty levels'. For now worries about the bloodshed in four Muslim-dominated provinces in south Thailand have retreated from investors' minds. But a terrorist attack could cause Thai stocks to plunge and strike a blow at its critical tourism industry which is just recovering from the December tsunami. Thai stocks look cheap and could be good investments, but are hardly risk free. Investors have been particularly nervous in the first half of the year after Thailand's current account, a broad measure of trade flows, swung from surplus to deficit, in large part due to a ballooning bill for oil imports. It was Thailand's large current account deficit which triggered its financial crisis in 1997, taking the index to a 207-point low in 1998. After a US$6 billion current account deficit in the first six months of the year, it should swing back to a US$2 billion surplus in the second half, helped by moderating oil imports, the peak tourism season and a pickup in exports. A turnaround in the economy is helping fund managers refocus on stock valuations which are among the cheapest in Asia. Mr White said the market was trading on just 7.2 times earnings expected for this year and 6.9 times next year's expected earnings. That is just half the valuation of the Hong Kong market which is on 14 times this year's expected earnings. As stock valuations are so depressed and many Thai companies have become model citizens in payouts, it has the highest dividend yield of 4.3 per cent among regional markets, barring Pakistan. 'There are some genuinely cheap stocks in Thailand for the first time in a couple of years. I have been moving some money into the country from elsewhere in the region,' said the Hong Kong-based manager of a boutique fund house. A key point is that the post-financial credit cycle has still not got into full swing. While there has been a sharp rise in consumer lending, Thai corporates have kept paying down their debts since the crisis. Net debt to equity is now at just 50 per cent, down from pre-1997 figures in triple digits. At the same time Thai banks still have a net surplus of deposits and loan growth has been tepid. The picture could start to change as industrial capacity use rates have risen to a post-crisis high of 72 per cent, making it likely that Thai corporates will soon take on new debt to add more capacity. 'A modest re-gearing of balance sheets would generate record high return on equity,' said Mr White. It would also be positive for Thai banks, helping to expand their loan books and earnings, and underpin economic growth. Thailand's gross domestic product growth was expected to almost halve from 6.1 per cent last year to 3 per cent this year, said Kim Eng Securities, with rocketing oil prices suppressing economic activity, particularly since Prime Minister Thaksin Shinawatra's government's recent decision to remove fuel subsidies. But there would be an uptick in fourth-quarter growth when a 1.2 trillion baht government infrastructure spending package kicked in, said Kim Eng. The stock market may get a boost in sentiment after Thai Beverage said last week that it was pushing ahead with an initial public offering application that could raise up to 50 billion baht, potentially Thailand's biggest. The company, which makes leading brands Beer Chang and Mekong whisky, had a previous listing attempt thwarted in March by anti-alcohol protests. Another long-delayed IPO may also go ahead. The Electricity Generating Authority of Thailand (Egat) would also rank as one of the biggest stocks if it can overcome worker protests against privatisation, which halted its previous attempt to list last year. The successful flotation of the two giants could spark more investor interest. But what should one buy? Mr White advises investors to focus on stocks exposed to Thailand's domestic economy to play on a recovery in growth and possible releveraging by industrial firms. His picks include the privately owned Kasikornbank and state-run Krung Thai Bank, which is trading on just 7.4 times this year's expected earnings and offers a prospective dividend yield of 6.7 per cent. He also likes Siam Cement, the nation's biggest cement producer, which should benefit from a pickup in economic activity and the government's infrastructure programme. The blue chip, with a highly regarded management team, trades on only 7.8 times Merrill's expected earnings for this year. Stock brokerage Phatra Securities was worth buying, said Kim Eng, as it stood to reap large fees if the Egat listing goes ahead, as well as enjoy a rebound in broking commission income if the stock market stays in an uptrend. Kim Eng also suggests Tipco Asphalt, the country's top producer of road construction materials. Among Macquarie Research's top picks are Advanced Info Service, Thailand's top mobile phone operator which is 'super defensive with low gearing strong fee cash flow and a 5 per cent [dividend] yield'. It also likes Minor International, with a stable of luxury hotels and restaurants, including Swensens ice cream parlours and Burger King outlets.