A review of my investment strategy, at mid-year.

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Global prime, upper scale real estate is in a bull market which is most probably overextended in the US -but more like in the early to mid-cycle in various other desirable & select locations, around the world including Thailand.

This is not surprising and likely to continue. During periods of anticipated higher core inflation, combined with still relative low global mortgage loan rates, the tone and timing is set for this asset class to continue to perform well over the next several years.

Although probably not so in the US, as there the housing market has been o­n the up-and-away, for far too long already. As noted in previous articles, there are special artificial economic reasons for the US housing boom, due to the fact that for most all Americans, investing overseas, is and remains a near impossibility. Entirely due to regulatory, tax flagging and broker camouflage.

Yet in general the US bull market in housing is most likely in its last phase, in my view. My take now is that I do not see a real sudden collapse coming as many think, more like sort of a rolling-over, where price increases will invariably be less and less and more cases price declines more and more. Unlike, the recent dot.com bull and bust cycle which was much made of “thin air” with no real book values or real earnings; the boom in US real estate is made-up of bricks and mortar, whose replacement values are still o­n the increase. Especially so during more inflationary times which we are now witnessing. The deflationists are dead! I never thought they would live long anyway.

Various globally famous investors and much acclaimed “Guru”s of recently, just got fried by first calling for a declining not stagnant US stock market and in the past year being heavily but wrong as it turned out, US Dollar currency, bearish. More then a few are licking their wounds at mid year with their short positions o­n the Dollar. Their shorts o­n, at the summer holiday & beach, may not feel so good this summer. Not us. Year to date the Thai Baht is actually higher in value a touch, as compared to the Swiss Franc. And if the Chinese Yuan revalues upward, as I do expect, more upward movements are in store. Probably most so with the Malaysian Ringit.

Anyway, I am not here interested in analyzing, nor predicting, the US real estate market. Instead, o­nly expressing my own view point at mid year 2005 that especially the luxury housing market boom in prime areas of Thailand, is more likely to continue -and perhaps even beat local stock market averages in the medium term. Building and labor costs here are much lower then most any developed country. There are no annual real estate taxes and yet many basic services are at hand. Affordable, besides above average health care, shopping, international schools -and not least: some of the best run and modern Airports besides route destinations in all of SE-Asia. Combine this with the attractive weather and beach/sun/golf/yacht/nature recreation and you have most all the ingredients to support a further price upward moving real estate market over say the next several years.

Of course there are always some pitfalls and the issue of proper land ownership structure remains a distinct dis-advantage to some and many foreigners accept 30 years leases, if the price is discounted. A few select locations are overextended as well, like Koh Samui, which has gone into a near frenzy of price spiraling besides looming infrastructure stardom. For now its in vogue but more potentially volatile.

Most Thai people dream owning their own quality home and it is a lifelong goal. Many have little alternative rewarding savings methods, which they understand, or trust. Bank interest rates have been low for many years. Yet, Thailand has been in a solid economic upswing for half a decade years and bank mortgage interest rates today remain less then o­ne third, as compared to the previous long cycle, the 1990’s. Home mortgages are also generally far more available with more competition between the banks then ever before. Perhaps even more then elsewhere in the world, there is a significant savings glut in the Kingdom and the lack of alternatives is fueling the real estate market. My bet remains that this will continue (see below).

In the meantime, the Thai stock broker industry keep refusing to re-invent themselves, that is other then lip service. While Kim Eng, the largest local broker, with an 11% market share, rightly laments “the SET’s biggest enemy is market volatility”. Mr. Montree, Kim Eng’s chief executive said recently: “The SET index is highly influenced by a number of volatile large cap stocks. Unlike in developed countries the large cap stocks are among the most volatile”.

True and right o­n the money Khun Montree, but the question remains what is Kim Eng and/or others specifically doing to help change this attitude among retail investors. Or to attract new, not trading, long term investors What are they doing to show savers another, better way? Most marketing officers -before as now- for the most part induce unsophisticated retail investors into short term trading, rather showing the benefits to long term investing, for high dividend income. They keep building businesses o­n “Johnny short term trades”, rather then cultivating long term investment relationships. Even if this means a short term earnings drop. And current broker management (nor the SET) are not really doing anything to counter this. Nor is the prime Minister voicing his concern.

Hence despite the talking, the status-quo remains and the local brokers are much to blame. For this key perceived reason (i.,e.”the SET is but a speculative place”), most all real Thai savers/investors stay-out of the local stock exchange, which so then keeps its entrenched reputation of a casino market. It’s a vicious cycle and its not changing for the better. o­ne key reason why the SET trades at a discount p/e to the region.

Still, we value investors can and have fore years been “fighting the tape” and dared to be different. We continue being challenged by the age long reality that, “a barging which remains a bargain, is no bargain”. Of course the high cash dividend income offsets this truism to some extend. Clearly since the beginning of year 2004, smaller capitalized high dividend paying value shares have taken a brake, as compared to pervious superior performance for many years.

Yet to be fair, I have at the end of last October clearly pounded the table to take another direction then the past. For the first time in the 8 year history of thaistocks.com, I declared that a highest percentage ownership in a property firm, Ticon (9.35) then and now makes most sense to me. Ticon and its new 33% owned listed property fund TFUND (10), listed o­n the SET in April, still is most dear to me. Ticon after all is a company which now owns close to 150 properties in 11 different industrial zones around Bangkok. Namely “plain vanilla” smaller factories, offered for 3-5 year lease terms. Ticon leases these to various secondary global manufacturers whom want to tie up assets in production, not land or real estate. A new clear global trend, similar to the “temporary employment” boom, of some 20 ago.

Ticon hence is and remains a neat Thai property asset play which fits into my now preferred asset class.  Appreciate how well the stock has held up recently, despite the SET’s 50 point fall since April, Ticon is just about at the same in market price as back then. And the TFUND has held its IPO price of 10, or within o­ne spread of this, despite the bear market o­n the SET during the whole second quarter.  Contrast this to many shipping stocks, most brokers favored recently, these have shrewd a third to a ¼ of their market value. Other larger cap, in vogue shares, have gotten hammered as well. Yet Ticon has held-up well and so proven to date to be far less volatile. A recent "value stability" in tough times; despite Ticon’s 70% price appreciation since the 4 Quarter of last year. What goes up, does not necessarily come down!

">Paulren@thaistocks.com

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Nobody can be certain what the future brings or what asset class will end-up with superior performance, down the road. While thaistocks.com focuses o­n what its name implies, I have always been first and foremost an objective investor; and so here share my objective views, at given times and over the years, what I particularly like at the time. I have made it clear here and for months before what my current opinion is on this.

While I have expanded the model portfolio just recently and surely would also include Rojana, clearly Ticon stock, besides class real estate in desirable locations with fantastic views and peacefulness, are my asset of preference at this time. My time horizon is 2-4 years. Keep tuned.

Best Regards,

Paul A. Renaud.