September 2010.

So called 'top down' investing,  as practiced vigorously by the global institutions has been in full swing in emerging markets for more then a decade!  This practice has given rise to immense and continuously increasing stock market pricing distortions and inefficiencies.  

With global interest rates at low levels individual investors here in Thailand and around the World are rightly so catching on in seeking yield on investments.

The mid to smaller companies are overall the long proven premium choices: as these mostly often have less volatile stock prices, much higher cash dividends and above average earnings growth.  This is a complete reversal as compared to the U.S. or Europe, where larger companies are associated with stableness besides attractive dividends and smaller growth companies pay no or very little in dividends.

Thaistocks.com has here documented since 1997 how one can achieve superior returns by being underexposed in the largest capitalized Thai companies and over exposed in value growth stocks, with high dividends.  Seek deep values along with high dividend yields and growth rates, not high trading volume levels. This theme is the long proven superior investment performance method here offered, mostly to invidiual investors.

Observations on the Thai Stock Exchange.   September 2010.

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"Firms with higher growth, lower risk and higher dividend payout ratios, other things remaining equal, should trade at much higher multiples of earnings than other firms".    By the authoritative book:   "Investment Valuation", authored by Aswath Damodaran Published in 2002, by Wiley Finance.   

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Yet, this is precisely not so in Thailand, as there are large market in-efficiencies at work here for many years already.  Value investing for high dividends has been for many years extremely rewarding on the Thai Stock Exchange (SET). Yet this is almost never reported -anywhere.

So why does this investor paradox occur on Thailand’s stock market?
     
Foreign institutional investors are often misguided when it comes to investing in the real ‘blue chip' stocks in Thailand.  The mid to smaller companies here are the long proven premium choices: these overall have more stable stock prices, much higher dividends and well above average earnings growth. This is a reversal when compared to the U.S. or Europe, where larger companies are associated with stableness besides attractive dividends.

This market in-efficiency is the result of  2 main reasons:

1)  It is no secret that Thailand’s stock market is dominated by local individual speculators. Local individuals regularly account for some 65-75% of total trading volume in recent years, according to the SET Investor Guide. Short term trading is an engrained way among Thai investors whom view the SET more like a casino, than a savings intermediary.

These dominant local investors like to day-trade the most liquid or odd shares. These local participants are liked by the Thai brokers, who encourage such a trading mentality, so to generate higher commissions. The Thai "equity culture" for the most part has not had enough time to evolve into more rational & balanced ways.

2) The global institutions, banks and so called "pooled funds" can only consider the very largest Thai shares for investment.  This is only due to their own large imposed liquidity requirements. Global institutions as well as mutual funds have strict mandates consider only investing in shares which trade in the millions of US$, every day.

Over the years a vacuum of value has so emerged in select high dividend paying secondary Thai shares, often the type of companies which represent the real back bone of the many honest and hard working Thai people.  Yet these are SET listed companies which make up some 70% of the Thai economy, and yet are hugely under-represented in long term investment portfolios for the 2 reasons above stated.

This misallocation of capital, progressing already for over a decade, causes the investment spotlight to shine ever more on the less desirable & competitive sectors of the SET.  While these companies usually have higher daily trading liquidity, besides market volatility, they also have lower earnings growth rates besides dividend yields.

The vast majority of business news as well as local & international broker research and other reports, focus almost exclusively on large capitalized stocks and more speculative sectors of the local market. Hence, over the years a classic market distortion emerges.  (Further, all broker research reports can be biased due to conflicts of interest, which is prevalent in many markets around the world).

The Thai banking sector is a prime example of this bias.  The Thai banking sector is the most over analyzed.  Bank analysts are usually CFA accredited, foreign, and paid top salaries to write well researched glowingly positive reports. This banking-overemphasis has been ingrained for many years.

Countless foreign institutions have been dragged into the “Thai bank trap”, only to be relatively disappointed over time, with their stocks long just average performance to investors.  Some then leave Thailand questioning if superior results can be obtained? Yet, far better & proven alternatives exist! 

But the institutions, hedge funds, mutual funds and local day traders simply conclude to not consider these. These so are and remain ever more, performance victims due to their large portfolios under management.

It’s a reported fact that less then 100 out of the 460 companies listed on the SET are researched by the brokers, this even while many of these under-researched smaller cap. companies' have been outperforming local and global stock indexes for many years with long & good reputations. 

Their p/e's are still lower, even while their net profits on average are growing faster.  Yet, despite their superior performance over time, most remain undervalued strictly due to their size.  Severe market distortions here remain entrenched, as I say in the first sentence of this brief introduction.

All this has been coined the "complexity economy", as is thoroughly explained in the most important business book of the year called "The Origins of Wealth", by Eric D. Beinhocker, Random House Business books 2007.  Its the radical remaking of economics where markets are hardly rational and stock prices rarely at an equilibrium price.  "We so see that real world markets are almost never in equilibrium..." Eric D. Beinhocker.   This increasingly understood reality gives understanding why on the Thai stock market huge discrepancies linger on.

A select group of astute investors are now catching on that these lower valued, faster growing Thai firms are in addition paying substantial dividend rates, often around 6-8% per year. These yields are double the SET market averages.  As the general level of interest rates, in Thailand as around the world, dropped over the past years, regular high cash dividend rates have gotten more and more treasured by rational blue chip investors around the world.   

 

We cannot fault the funds or institutions for their own imposed liquidity constraints as they are just too large to take advantage of the better valued, but less liquid, high dividend yielding secondary Thai shares.  If a fund manages' say 100 mill US$,  the minimum amount they must invest per stock, is around 2-6 mill US$.

Yet in practice, this is by far too large of an amount to be absorbed by most secondary Thai shares here. Their own mandates & protocol simply prevent any of these funds to consider anything less then most liquid local shares here.  Hence, some of the best local stock values remain completely of their radar screens.

The fact is, that Thailand has many secondary companies which regularly distribute high cash dividends -and this for many years already.  Realize, these are often leading companies in their respective industries, yet way under-owned by investors.  Often Thai secondary companies are the true backbone of the country and have a rather long history in paying out anywhere between 40 to 70% of net profits in annual or quarterly dividends. While this was once reported in the "Neue Zurich Zeitung" in Switzerland some 4 years ago, this rarely ever gets reported by anybody.  It is not in the institutions interest to dwell on their own inherent investor weakness.

To summarize then :

1) While often being leaders in important industries, this group of value shares is vastly neglected for the above stated "artificial" reasons.

2) Despite long term profit growth, being twice as fast as the SET average, these secondary stocks still trade at often a large discount to the Thai average market p/e multiple.
 

3) Many are quality and for many years already established growth companies, with little debt and low p/e ratios -and yet have very high dividend rates, often yielding 6-9% annually.

For nearly 20 years on location, I have analyzed, visited, researched and demonstrated through Thaistocks.com that there are many exceptional "value" opportunities available in Thailand for those who are willing to take a closer look and not invest millions of Dollars. This investor theme has proven to be very rewarding and so for many years -as we can document.

With the Thai smaller cap value strategy one can often incur less then market volatility. As here the investor objective is to focus on high dividends and low p/e ratio's. Unlike the institutions which must always consider average volume trading levels.

In the past I was able to prove regularly that such a smaller cap. value portfolio fluctuates less, quarter to quarter, year over year, -and yet produce better total returns, as compared to the larger capitalized shares. Total returns means capital gains plus all dividends. In investment finance, risk is always defined by portfolio volatility. 

The conclusion: smaller cap value shares on the SET fluctuate less, perform overall better over time due to higher growth rates and have higher dividend yields -as compared to the Thai SET market averages.  They so "taste great and are less filling", while often being the performance stars.

Best Regards,

Mr. Paul A. Renaud

www.thaistocks.com

Paul Renaud, has 20 years -on location- professional experience around all aspects to successful Thai stock exchange investing.  He is an ex-Morgan Stanley licensed broker from Chicago USA.  Mr. Renaud speaks fluently German Swiss-German, English and French. .

His professional resume can be seen here:
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For the past 20 years, on location in Thailand, and since 1997 with Thaistocks.com, I have intensively focused on the value investing theme here as a way to reduce market risk besides increase total returns.  Rational individual investors in Thai stocks should focus on "what Thailand does best" and this just too often does not include the exchanges' daily share traded volume leaders.

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