As a New Year approaches, what next?
As this year comes to a close it pays to reflect back some and try to anticipate what year 2004 may bring, as always just as seen from my point of view.
As we well now know: the past few silver years belonged mostly to the "buy high yield and just hold" investors. Many of us whom sold too early where both glad and sorry at the same time. Glad to have made a nice and above expectation profit but then sorry for not having held on longer. Such are the emotions of greed and fear. While Thai stocks in general are highly charged with a prevailing sentiment, the overriding winning investment theme for last year, yet again (up until December anyway), was that high dividend stocks remained in fashion and value investing in general, beat big cap chasing. After some periodic spurring, only by December did the Bank stocks finally catch-up. Better late then never. Thaistocks.com is proud to have been able, yet one more time, beat the market averages with its two separate model portfolios and one new growth stock model, introduced here on October 15. "03. While never stale, we are even more content in having introduced and explained for many individuals the in’s and out’s to responsible and successful Thai stock market investing and correct understanding.
The new growth stock model will be updated every quarter and the latest running model portfolio (started October 1 "03) will continue to be posted every first of the month. To be more fair however, I will start noting changes made/advocated during any month to this model, starting with the updates on January 1 "04. These periodic changes will clearly be noted in an article or comment. So stay closely tuned.
***
As the SET rally broadens and matures next year it will be more and more difficult to beat the SET benchmark index, regularly, quarter after quarter. For one, this lonely benchmark index (as noted before) is not a fair representation of stocks in Thailand because too much weighing in too few large cap stocks, unfairly influences its movements. If the Bank & Finance stocks don"t move up more, the SET index will quickly look lame. Yet, January "04, may well see a broadening-out of recent gains. Many recent smaller cap laggards should by then catch up, even while big cap investors may by then note and write about the new SET index consolidation. And so the general fallacy will continue: the SET benchmark index is not really representative of the new bull market in Thailand -and large cap stocks are not the only game in town -regardless what the press or institutional investors are saying.
Still, I think next year will represent some of the best of both worlds as larger cap shares along with value investing smaller darlings, will both excel in value, but at different times. More and more will catch on that an essential ingredient to above average investing here (by smaller investors anyway) is to mix the two; this is the ideal way to maximize returns along with lower then market risk. Remember, many smaller cap stocks have rather low Beta ratings -meaning not very well correlated with SET index movements. The larger cap shares on the other hand have for the most part high beta ratings. This is just the opposite of many developed markets, where large blue chips move up and down slower then volatile smaller cap shares. In investment finance one can prove that mixing more volatile shares with less volatile shares often results in lower risk and higher returns. The problem becomes when you are a larger investor, as then mixing in smaller cap "darlings" is not an option and so "off the radar screens", strictly due to relative low daily volume levels. As for largest investors, daily volume levels traded is embraced and cheered far more then say high dividends or low p/e’s. This is what has in the past, and can in the future, greatly distorted developing stock markets.
Here you may think, if you can"t beat them, then why not join them? Wrong, as very high cash dividend payouts by smaller cap shares (in an environment of low interest rates) are what will pull the level to a more playing field.
Security selection will become far more important next year. A rising tide does rise all ships, but from now on security analysis will be more and more important then just deciding if or not, to be fully invested. The good times are coming to and end and so above average returns will belong to the better performing companies, rather then to the investor whom forgot to sell.
Here are some specific observations which I want to make based on sectors and otherwise:
The more cyclical sectors of shipping and chemicals do not deserve above average market p/e’s, hence they are starting to look pricey to me. While both are in a fantastic up cycle, this will not last and stock prices here may well peak a year before the cycle does. We are getting close to this and some pairing down here is now prudent, in my view. I am likely to move ATC and NPC soon out of the model portfolio.
Domestic consumption will persist and remain the frontrunner to this Thai economic resurgence. Government spending and infrastructure will closely follow, this is why I am not yet willing to end my renewed "love affair" with STECON. Yet, the level of consumer credit financing should start to level off. This is one reason why I reluctantly only include one consumer finance stock in my model portfolio. While Thai bond yields may rise more, domestic interest rates and inflation will remain very low next year.
I refuse to comment much on the Thai Bank and Broker sector because a) there are plenty of others overanalyzing this sector and b) ...shall I say my personality is not one that is conducive to Thai Bank stock investing. The stock brokerage sector here is overcrowded and besides the stock transaction business is a "sunset business" -due to very low buy/sell commission rates. Hence, while both these sectors may periodically have noticeable price spurts, I suggest you decide for yourself if you want to invest in any Bank or Finance shares. My view on this has not changed since 1997 and I realize that "I may miss the boat" on the new and better Thai Banking sector? So be it...I just think we at thaistocks.com can add more value by pointing out good investment ideas, beyond these service sectors.
Unless the US Dollar weakens considerably more, versus major global currencies, I do not see the Thai Baht getting much stronger vs. the US$. This is the opposite of what I here wrote last year, as back then I predicted some Baht currency strength. This is a risky call because the more stable politics and financial rankings of Thailand finance/banking and government sectors, may well be the caveat which will firm up the Baht some more.
Some concerns is the still lack of new private investment resurgence (not stock market investment), at this point in the cycle private investments should be accelerating. Another concern is the rising price of energy, but since Oil is priced in US Dollars, the actual Oil price is lower now in many countries. But not in Thailand, as the Baht has appreciated far less vs. the $ then say the EU currency. There are global concerns as well, like Saudi Arabia and its 6000 Royal family dependants or SARS II...but I will not ponder on those here, as we are rightly called thaistocks.com. I still think the SET exchange could be doing a far better job like introducing good until canceled orders, stop limit and stop loss orders...besides introducing a smaller cap SET index.
All in all things are looking up and bullish and year 2004 may well be the golden year for a new Thailand. Based on strong economic growth, stable and able political leadership, low inflation and interest rates and a (hopefully) post Saddam braver world. Of course, I no doubt am missing something but for now its invest and hold on. Just try to understand what you own -and why.
My view remains that we will see 800 on the SET index before June 1 and today I think 900 is a real probability -sometime before end of year 2004.
Very Best Regards. Happy Holidays and Healthy New Year, if you celebrate this.
Paul A. Renaud.
