Risk analysis going forward.
According to my records, 60% is the largest 6 month gain in the history of the Thai Stock exchange. And since the Thai Baht currency has appreciated versus the US $, the total US Dollar return in this period is close to 65%.
The SET index benchmark was at 403 on June 1 and closed at 646 on the last day of trading in November. Even with the Thai Bank stocks still lagging, the index had a fabulous run during the past six months. What are some of the risk factors moving forward?
Here I list some that come to my mind. We welcome members to contribute by adding or contesting, some on this short list. My list below is in no particular order but the first point is probably at the top of the list of concerns.
1) The overheating of the Chinese economy. 7-9 months ago the concern or hope was that SARS would finally contain the raw momentum of the Chinese economy. It has not. In the 2 Quarter of this year reports stated 7% economic growth for the middle kingdom. This has now been increased to 8-9% of annual GNP growth. There are no cooling signs, au contraire. China is making more TV, cars and washing machines than it can consume. A glut of Chinese products may well destabilize the world economy by year 2005 or 2006? As just one example, there are some 200 car manufacturers in China. Old weapon factories are being converted into industrial sweat shops. Banks are lending relentlessly, real estate developers are building with no sign of caution or end. Its all too much too soon...the Chinese are building smelters, importing steel and other raw materials which invariably look like a boom and bust scenario to many of us. Chinese soaring demand for metals, as just one example, has caused sharp rises in metal prices around the world. Just as in the 1980's came the long and hard US/Japan bashing, so could a serious trade dispute erupt between the US and China, over the undervalued Chinese currency.
Even the regional shipping up cycle should be viewed with some caution soon, as the cargo pricing going through the roof will not last and any Chinese economic hard landing will precipitate a massive decline in shipping rates, I believe.
Overcapacity in key areas could result in a boom and bust scenario with vast regional and global consequences. The next Asian economic crisis will start in China, I fear.
2) The sudden death by one of Thailand's key men. The current political strong hold by Mr. Taksin is admirable and has/will reduce the political risk level of this Kingdom. This is a yet not fully discounted positive. However, maybe the opposite could happen if one of a very few key stabilizing figures in Thailand leaves us suddendly. I do not predict this, I just raise it as a risk factor which if occured, could have some unpredictable short term consequences.
3) The Thai speculative bubble comes back. Many of us remember the follie of booms in the mid 1990's. Where rampant speculative excesses dominated the SET at the dire expense of the real economy. A few large cap stocks soared to very high valuation, which was explained by some guru's at the time as being perfectly normal. "Unlike in the west, our markets are pure liquidity driven", where the now long proven silly words to me of one such Thai PhD director. This managing director of a prominent local brokerage firm in Bangkok did not even see that a huge problem was brewing by early 1997. We can only hope that the current government does not allow that same road traveled before.
Of course that economic bust, later called Asian Crisis resulted to spectacular capital gains realized by a few Thai smaller cap investors whom followed and agreed with our insights at the time. As from 1997 to year 2001, the Thai smaller cap value shares paid awesome annual dividends and multiplied several times in market value. To those individual investors the question then relating investments was: Asian crisis, what crisis?
4) An unexpected downturn in the local economy or an equally unexpected rise in local interest rates. The long government Thai bond yield has risen sharply over the past 4-5 months. But the bond market in Thailand does not dictate the level of interest rates, Thai Banks mostly do. And while this risk seems the least worrisome as compared to others mentioned here, it could well happen. This risk is in combination with point number 5 below.
5) Another major global terrorism attack, a SARS II or soaring Oil prices, well beyond expected. Here I include the various global macro factors beyond Thailand's control. A developing country is often more vulnerable to external shocks. Tourism is a mighty big industry here and any setback here could dent the economic recovery or suddendly push inflation way up? Here I would also include the risk of China being increasingly a serious & major competitive threat to Thailand and that by say year 2006, this threat is being factored in by valuating down many SET listed firms as being in the new sun-set industry. The economic sun rising in China but falling on Thailand. Yet my own even bigger fear is that China will boom and bust its own cycle, before this happens. ***
These major risk as outlined above represent to me some of the major Thai stock holder risks, going into next year and beyond. In the meantime, I still believe the SET bounce will stall shortly and then remain in a trading range until year end. Being on guard and recognizing some of these various risks, I do think next year looks good for the bulls to take charge and run again with a SET above 800. But the risk levels have also increased, not the least because many Thai stocks have already had a fabulous run.
I most welcome any member contributions to add to this list, contest or challenge it. Many of you have realized the upside potential now, as fabulous year 2003 comes to a close. But lets think a bit about the downside risks. After all, a good profit not taken or enjoyed, is no profit at all.
Best Regards to all members,
Paul A. Renaud.
