An easy answer to a long asked question here.
Post 1997, for years then the Thai stock market traded at a p/e discount to other similar emerging markets around the world. For years since quality Thai growth stocks traded at a discount to their large peers listed on the same exchange.
While there were many periods of superior performance by the smaller choices, they remain less valued even while they had higher growth rates, higher dividend yields -and many of them far less volatility.
This is a dichotomy many pro’s and non pros have asked why for long. (Pre ’97 was a bubble as so it was not normal). Many times I visited fund or company managers, astute investors and various others, the question always came up: why is this so?
The one group which did not ask this question often if at all, where the Thai brokers. They got biased or brainwashed, these just wanted to see more commissions…so to participate on the Thai stock market was to promote day trading. “Nobody invests for long term here, if you want a long term investment I can introduce you to my Uncle which has a great piece of land for you”, this is what one broker manager told me in all sincerity some time ago.
As I pointed out many times in past articles, in developed countries smaller growth stocks trade at a p/e premium to their general market and pay near zero in dividends. This in fact is totally rational as a company which grows twice as fast is worth three times as much.
The Question for some remained:
Why do trillions of Baht remain Thai Bank accounts, year after year, at a 0.75% annual interest rate, while lowly leveraged SET/MAI good stocks with up to ten times or more in annual dividend yields, just get ignored? And increasingly so. Are Thai and foreign individual investors here so inept when it comes to allocating their savings, beyond land/real estate or condo’s? Why is this?
Could it be the SET/MAI leaders which have done a poor job? Perhaps. But certainly not the MAI, as K. Chanitr there lately has been a very energetic leader of a new generation. The open question for these however are they enforcing the rules? Are they punishing the cheaters, like more developed markets do.
The reason I suggest low valuation remain this way, is the low level of overall confidence which has been ingrained for so long here that investors as well as the Thai public in general, gave-up thinking it could ever be different. After all, would you participate in playing a game with a group of people when you know there are some participants which don’t follow the rules of the game? The answer is obviously no.
Worst of all if the group as a whole, then sort of tolerates these non-rule followers by not kicking them out of the game. The result is that some people feel, that if there is no punishment, why follow the rules? If one gets away with non conformity of the agreed guidelines, actions to ones self benefit, why not take advantage by circumventing them? More then a few behave like this in any society.
Weekend Example at a shopping center.
At the “Central Festival” shopping center in Phuket every Sunday there are often too many cars for the underground parking. So, many cars just double park illegally and then many block the very people whom parked correctly. You can wait 10-20 minutes or more like 2-3 hours, (or who knows how long) in the bad air enclosed parking garage), until the illegal car owner finally comes and moves his car away, yes with a smile. Once this happened to me, so I decided to just go back to the shopping center and enjoy reading on their benches and watching the crowd, and waiting.
When I came back, that car was gone, but then I was blocked by yet another car. So now I just don’t go there anymore on a weekend, in fact I shop elswhere. While there are parking officials there, they don’t enforce the rules by fining the owners. They just announce to please move your car. This has been going on for a long time. Even a passing police car does nothing, while watching a legally parked car being kidnapped by an illegally parked car.
This is the core of the problem -and an eventual revolt is ingrained in our genes, even in a more tolerant society like Thailand: When a populace sees certain members not follow the rules, and then these just go unpunished, they either take the law in their own hands, or more likely just don’t participate in that activity in anymore. End of story.
This is similar of what just happened in the locked-up US induced credit crisis of late which are not lending now as they don’t know whom will be next to default. The just don’t participate in this activity anymore, no matter how small the risk. The system so brakes down and billions of $ get lost. As to participate anyway in such a frail enviroment just goes against our ingrained genetic wiring. (It has been shown that a group of people can revolt very strongly, emotionally and even irrationally, against non-conformist. It is so ingrained -as its essential for long term survival of our species).
This then is the problem in Thailand now as for a long time. Too many non-conformist to the agreed rules, or outright corruption, and then: far too little being done to punish these. We here all see it with drivers on the road everyday…and just now with the BKK Airports closings, participated by so many reasonable middle class people. "No more of the old ways, regardless of the damage to stop it". In the future the current uprising is for the better here, as I think is happening now: that is If it means, non rule followers and/or corrupt get thrown-out and punished, vs. the opposite (status quo) of amassing even more power.
If resolved, even at a high current price, then a society can go on being more contempt, more trusting and so feeling better which leads to accepting more uncertainty. It can/will lead to the foundation of then more participants in the local stock market, all due to a higher trust -besides confidence. It must mean that culprits will be punished, not benefiting.
There are other benefits of course, but I am relating this to SET investment/valuations in this article.
Perhaps in the next few years Thailand will not grow as fast as it would have without the current up-rise. But if this leads to a more civil rule following society, the p/e ratio’s will increase and far more investors will participate, as they would have more confidence. This is a no brainer. After all, the same thing happened all over the world when companies instigated good corporate governance.
For that reason I for one have some hope and remain upbeat, that things are changing for the better, just as they are now in various other places of the world.
Best Regards,
Paul Renaud.
