The outdated SET index benchmark
The Thai stock market is a market of stocks, not a stock market.
Last month we saw a 19.5% surge on the local SET benchmark index. This is near a record percentage advance for any single month, ever. That is if you follow the index, which I don"t. Casual observers may conclude it was pure buying madness. Yet if you look closer, and we regularly do, you see that only 160 stocks went up, 27 remained unchanged and 254 actually went down in value, during this same 31 day period for the month December 03. In fact, all 464 stocks and warrants listed on the SET were up on average of only 1.72% in December. So what is going on?
As we have pointed out for some time, the SET is a market full of untold opportunities and of course risks. The SET index is a distorted and outdated index because it is weighted based only on market capitalization, not by number of stocks. If a few big fellows drop or increase in price, the index moves and casual observers conclude accordingly, but often wrongly.
During the difficult 1997 to 2001 period, the SET index kept dropping, yet many secondary value shares increased nicely in value, on top of their fat dividends. These same observers wrongly concluded that Thailand was in a bad bear market. While true overall, many individual shares had fabulous price runs. This we documented all along at Thaistocks.com
Bank, Finance and the Energy sectors make up over a third of the total market capitalization of the SET index, yet routinely these 3 sectors make-up almost half the daily trading volume. One may conclude what is good for Bank shares, is good for Thailand. Or, equally off-beat, that to benefit from Thailand’s economic resurgence one just sticks to buying the large Thai Bank stocks and so calls" smartly oneself invested. I say to those, think again.
Had you done this last year you would have underperformed the index up until December, as only during the last month of 2003 did this sector have superior performance. One great month out of 12, does not cut the mustard in the long run.
There are many shares on the SET which are under-researched, pay high cash dividends and represent truly what Thailand is most competitive at. Some companies would benefit if the Baht weakens, hence provide a natural indirect currency hedge. Others would benefit if the Baht strengthens, or if China revalues its currency upwards. This allows an investor to tailor some of his/her biggest perceived risk. After all, most foreign investors are rightly so worried that their stock portfolio could lose in value, after converting it back home, this even while the Thai stocks went up some. With Bank or Finance stocks no such tailoring is possible as these are for the most part currency neutral. Bank stocks surely are not expected to pay high dividends this year. I for one have avoided the Thai Banks shares for a decade. With the SET at 790, I also think they are vulnerable to a price correction.
The point is that the SET index is not at all a true reflection of what is occurring on the Thai stock exchange. By mid January this index may well correct, just as smaller, faster growing Thais stocks wake-up and catch up, resuming the trend of the past which is mostly beating their big cap cousins, as we have shown in our various model portfolios, which do not include a single Bank or Finance stock.
Best Regards,
Paul A. Renaud.
