Enough fuel to wait out the thunder storms.
With the SET index just now at 666, I advise to keep the seat belt fastened, sit back and relax.
On my way back to Phuket there was a formidable thunderstorm and they closed the Phuket Airport. The pilot informed the packed plane about this, but then added "don't worry we got enough fuel to circulate for some time". This was the key statement, as invariably the storm eased and we safely landed with only a 45 minutes delay.
I share this with you as it sort of sums up my view now on the SET -and our favored stocks. Long term investors have enough fuel to wait out the storm and come in for a safe landing, even while we don't know the timing. Storms, like one currently pounding on the SET, are likely to blow over and for us who can wait, we remain overall in a good position. One more reason why I never advocate margin accounts -and refuse to get sucked into a trading mentality. Long term investors, by definition, have the stamina to "wait out the storm" and accumulate buy more, on any dips.
While I have recently dared to call 646 the SET bottom, I actually should not make such statements as: 1) Nobody knows this anyway and 2) it is well possible there is one more leg down on this vicious market correction. I still dare to think not, but obviously nobody knows. What I do know is that the stocks I rate as strong buys will combined one day show very good returns.
Here today I wish to review some of the shorter term graver concerns (the bear case) and so why the SET for now, may have "closed down due to storms". Summer months are likely to be boring at best and hence I view the next few months as likely to be "dead money" for most of our stocks in general as well as for the SET market. And while a new SET low may well yet materialize, I view the current sluggish market an excellent entry point for long term investment capital. I also think by the end of the year will witness a catch-up and there will be time for a "save landing".
So sit back, relax, don’t worry and enjoy the flight awaiting this storm to blow over. In time I think our selections will overall produce substantial gains. All the companies I visited last week, including Ticon, I now rate "strong buy" on current prices. Namely: TLUXE, UMS, SMIT, TOG, and TICON and of course SPALI. This is my favorite short list and my company visits, just re-affirmed this conviction.
Here are the macro concerns for now:
1) I expect some further earnings downgrades to the overall SET stocks (but not for most of our choices!) as Thai ROI's, pegged at currently 23%, are likely to come down from this lofty level. If the Thai economy weakens more ROI's will get descend, especially so to leveraged larger cap. companies.
2) There is some probability the 2nd half of the year will see further deceleration to the Thai economy. Upcoming domestic weakness along with weaker then expected exports should be the catalysts. The upbeat numbers for the first half were a bit misleading due to "a strong oil related base effect". Realize that the energy sector is by far the largest sector on the SET.
3) Summer months are historically not good performing months for the SET in general. If you go back one can see that often July to October, are lagging months. I now fear the same could be true this year.
4) Bank stocks (a sector I have never advocated) are likely to be a drag on the SET index (Banks are the index's second largest sector) from now on, as this group has rising funding costs along with now slower loan growth demand. I expect the Thai MLR rate (bank prime interest rate) to increase even if the Bank of Thailand does not increase rates further.
5) Government spending will not save the day, as there is a lack of government for now. Hence this fact will be a drag rather then a help, as previously expected.
6) Earnings downgrades for large cap stocks likely to continue as large cap SET companies overall have high operating leverage, second only to Korea. Higher interest rates along with slower economic activity could dent their earnings visibility.
7) Foreign selling may actually not be finished for now? Consider that since November of 2004, foreigners have bought some 7.3 Bill US$ worth of Thai shares. Since the SET peak of 785 they sold a total of only 1.4 Bill.$. Hence foreign selling recently is only about 19% of what they previously bought. And while foreigners where net buyers yesterday, its unclear if another selling wave will hit the SET. This could happen if a bearish event happens in the US or EU, and may have nothing to do with Thailand, as foreign institutions so often sell the foreign markets when a domestic (not Thai) bad event happens at home. I call this the "Plugging holes at home by selling out foreign emerging market shares" phenomena.
It is impossible to know if the above seven concerning points (and maybe more which I may have missed) will lead to another round of SET selling? My point is not so much a cautionary one as one which warns our members to be prepared to hold on tight for longer, as my updated view today is one for an eventual long and boring SET until things are more settled, later during the year.
Best Regards,
Paul A. Renaud.
