MAI vs. SET index, why is the MAI lagging?
Last week I had a chance to invite K. Chanitr for lunch and catch up on why the MAI index has been lagging so much, year to date.
At the link below you can see how the MAI index is up 12.97% for the past six months, 3.18% for the past 3 months and only 11.59% year to date, all considerably less then the SET index which is up 52.10% for the past six months, 13.28% for the past 3 months and 46.01% year to date.
Performance of MAI index:
http://www.mai.or.th/mai/marketSummary.do
Performance of SET index:
http://marketdata.set.or.th/mkt/marketsummary.do?language=en&country=US
To be fair, members should not have been left this much behind as my latest model had some soaring property larger cap stocks besides a few nicely outperforming MAI selections, like DEMCO. This selection I re-visited for us last month, just before the latest price surge from 2.60 to over 3.80. Yet, the big important call this year was to stay invested and ditch the pessimists as many got whipsawed. The lesser good call was to keep overweigh MAI stocks. Yet, my own record here shows near or equal SET index performance since mid April ’09. Then I here wrote the time has come where the Thai political discount would narrow going forward and the world economies likely recover.
But yet, why such a broad MAI/SET divergence, year to date? Is this long MAI lagging now an opportunity, or the start of something new? In past years it has been shown that MAI stocks, in general, outperform the SET index. So what is happening now? This is the key question I try to answer, as I am only loyal to superior performance, over time and with less risk, which is defined in finance as volatility.
First it must be stated that in the US, long term studies show smaller cap superior performance over time as well, and this despite the fact that, unlike here in Thailand, smaller cap stocks usually trade at above average p/e ratio’s as compared to big cap.s This is normal, because a company which has say double a long term growth rate, as compared to another, should deserve more then double the valuations. No doubt, smaller cap niche companies overall have higher long term growth rates. Duly note that in the US and other more developed markets, smaller cap growth stocks rarely pay any cash dividends, vs here the smaller cap stocks pay high amounts of dividends, in fact often double the SET averages. It was such high dividends and niche companies which convinced me to remain mostly smaller cap. focused during the global recession of 08-09. As you can see from the above shows index returns, this was wrong so far, as overall these got hit worse then many of the SET dominant large cap’s., like energy, property, petrochemical and banking.
After my meeting with K. Chanitr and reflecting on it more, here are some of the reasons why this divergence this year:
1 The SET, as of recent, is mostly energy, petrochemical and bank stock dominated. Surely one of the surprises as year 2009 progressed is how the price of oil rebounded, just about doubling from its low price early this year. This so had a dramatic effect on those share prices, which benefit from higher oil prices (even more so as is perceived in a magnified way by investors).
2) Thai banks were not much effected by the banking crisis cooked up in the West, as they never got much involved in complex derivative strategies and more so, US housing ninja bonds and that whole mess/scandal/horror. Thai banks were so saved by this -and hence mostly a bystander to the global financial crisis. Unlike in the Western economies, no Thai bank got into any kind of trouble.
3) Most smaller cap MAI stocks are in primarily exports and/ or manufacturing. As the global crisis unfolded, they so got hit -as both exports and manufacturing slowed down due to the US induced global recession. Again, this is magnified due to perception, because investors lumped all the MAI stocks together with one given label, regardless of industry or exposure and decided to avoid these. As it turned out, they were not off on this.
4) This held some truth because net profit margins decreased more on the average MAI company then on the average SET firm -and high dividends were so held back in ’09. Part-due to the average MAI company being shocked and confused by the rapidly deteriorating major global economies, hence many decided to preserve cash. Yet, 42 of the 53 MAI companies remained profitable.
5) Along with #3 above, no large cap SET company is a primary exporter nor a manufacturer. The SET index is weighted by market cap, which means the large oil/petrochemical and bank stocks make up most of this index. The bigger the company the more it has an influence on the SET index.
6) In past economic cycles many institutional investors decided to stick to core positions in Thailand and only make percentage increases or decreases. This financial crisis was of such scary magnitude that by late ’08, these unprecedented before, eliminated just about all their Thai stock exposure. When they saw by the 2Q, that “the world as we know it would not end”, they decided to come back with vigor to re-establish their previously long held core positions. This magnified the SET stock sell off late last year -and equally so magnified the bounce back this year. They so undid their big mistake in late ‘08, by adding back their basic positions by mid ’09. Surely, the SET index should have never dropped to around 380, or close to 12 year “Asian Crisis” lows! This swing factor magnified the initial casual observations/conclusion that MAI companies are now falling behind.
What this shows again is how volatile over time large cap SET stocks truly are. They overshot on the downside late last year -and now are catching back up…yes, and then some mostly due to the resurgence of stock markets worldwide which as of Sept ’09 , has beaten just about all previous upbeat expectations. While there may well be some overdone euphoria at present time, there is no denying economies are coming back from the proverbial grave and the bears were plain wrong.
But then we must ask: if things are getting better and much faster then most expected, through the global economies bouncing back already, lead by China, is it then not also reasonable to expect the MAI index will catch up? This so because in reality and in perception, these are exposed more to the real economy then the SET large cap stocks are. Also, if the average MAI company preserved cash by taming dividends this year as the record shows, does this not bode well for the future, as these companies overall are now stronger then ever before. This last point is worth of some pondering because it has been well documented before how much under-leveraged most smaller Thai companies here are, even so well before this latest crisis.
My call so is that as the global economies continue to recover, so will the MAI. And It does not matter much if this recovery comes from China/India or the USA. There will come a time, not long in the future or maybe started already, when MAI stocks catch up, just as the global recession fears now fade.
I duly note that in all stock markets there are time periods where the winning investor theme of past, takes a brake and underperforms for a while, or even vanishes. Though, I don’t subscribe to vanishing.
This has been such a lagging period and I am sorry in not having seen it coming. But as time invariable and always progresses forward, this reverts back to its long term trend, which in this case means longer term outperformance by smaller high growth companies with their large dividend rates along with less volatility of the large cap stocks. Its clear why and you know it: higher longer term growth rates, lower p/e valuation and double the SET average dividend yields. The timing of this is impossible to know for certain, but my call its “anytime now”.
Yet don’t count on your brokers, the press or institutions telling you about this as its not in their interest in doing so.
Best Regards,
Paul Renaud.
