As the SET corrects more I outline some macro risks. 5 fresh ideas I now like.

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My travels continue into April.  The month of massive Thai holidays. I take more of a brake and reflect some more where the next macro risks may come from.

After my escape from Zurich to Zermatt, Switzerland I am now back at the dead center in Hollywood where I rented an AirBnb apartment right in this thriving glamor metropolis. The young man made his money in US stocks to buy this place.  It’s another great sunny day on Sunset Blvd, just a few blocks away from Hollywood Blvd. People are more engaged, friendly and relaxed which I find invigorating. There is a sense of enhanced internationalism here.  For sure less stiffness than expensive besides aging Switzerland.  One black man explained and showed me how to use Uber, a superb new private car way to get around. Came about due to sassy, expensive and unfriendly taxi's in San Francisco.  Later an attractive & friendly lady directed me to a real good restaurant full of fun people. The biggest hair saloon I ever witnessed had a very professional pro., style my hair for 25 bucks. 

Some ask what I do and I say "am just a drifter, traveling around", to which they all answer "what a great way to spend some of your life". Here they seem genuinely put-on by it, not distanced. They are more open, more engaged and friendlier and so perhaps I did find a place in America which is less then what I describe in my previous thoughts on this.

SET flirts below 1500 for probably good reasons, looking back.
Asian markets have corrected some of late not least Thailand’s SET. The big question now is this just a pull back to around 1500 as I felt so far,  or the start of something more serious?  For some months I have been more SET guarded and its one reason I decided to go on a vast Western world journey at year-start, rather than stay put on a lethargic SET. 

I think we here all know some of the core issues facing Thailand, continued GDP sluggish even despite lower oil prices of late,  stable politics but lead by non-economist (this bothers me less then some), somewhat surprisingly overall poor corporate profit reports of late.  Also as I restate below, falling into the middle-income trap and a rapidly aging population. Will Thailand get rich before it gets old?  There is the other one we cannot mention here but this is overdone/worried and a source of regular speculation by some foreign institutions whenever they want to move funds into,  rather than out of the country. 

2-3 astute & long members have, as I reported, signed off in recent times due to their worry of the US imploding.  Ever since I’ve been the age of 16-17 and paying attention to this, I hear these US doomsters.   In some ways they are right it aint' here what it used to be, but where is it not so?  Lately the US$ bears have been hibernating near death, as they have been as wrong as those whom predicted gold would soar past $2000 an ounce.  Shame on both of these fear mongers.  They not only missed one of the greatest bull markets in US stocks ever in recent years but some actually lost capital on being short US$ and or Gold.  We should ask, is China more of a risk then USA?

As always there is plenty to fear, here below I present one which the US bears perhaps have been missing.  Hardly in disguise, it gets far less press then it deserves:

Recently China’s international financial showmanship at the Asian Infrastructure Investment Bank  (AIIB) is impressive even while it casted a shadow on the US for lack of grapsing it was about to happen. This however should not distract attention from some deep financial fragilities the world’s most populous nation holds.

The UK and other major Western countries early last week defied its “special relationship” with the United States by applying to join the China-led Asian Infrastructure Investment Bank (AIIB). France, Germany, Italy and Switzerland quickly followed suit . Likely Australia, Korea and even Japan will be the next AIIB joiners.

The creation of the AIIB is a direct challenge to the U.S.-dominated post-war international financial system centered i.e. the IMF and World Bank.  To many a symbolic of the financial power of China besides the waning influence of the US.

But China’s nouveau international financial showmanship should not sidetrack attention from China’s deep financial fragilities right at home.
China’s total debt has risen from $7 trillion in 2007 to $28 trillion by mid-2014, according to a recent report by the McKinsey Global Institute. This accounts for more than one-third of the growth in debt globally. 

Demonstrating 282% of GDP, China’s debt is now even larger than that of the United States (269%) or Germany (258%), but less than that of Japans.
Mind you, China’s rapid debt buildup is about double that of the US before the global financial 2007 crisis or as I read that of Korea before the Asian financial crisis.  If the current pace of debt buildup continues, China’s debt would reach 400% of GDP by 2018. Wow.

This debt explosion is the result of the government’s stimulus program in response to the 2007-8 North-Atalantic financial crisis.  This stimulus took the form of directed bank lending, mainly to state-owned enterprises (SOEs) and local governments. Recently, this was followed by a boom in so called shadow banking finance.

China’s debt is concentrated in the SOE sector. At 125% of GDP, China now has one of the world’s highest levels of corporate debt. While China’s government debt is more modest; this could change rather quickly if the government were obliged to bailout SOEs or to recapitalize financial institutions.

China’s debt binge has therefore created many vulnerabilities. Loose shadow banking accounts for nearly half of new lending since 2008.  More than some local government infrastructure projects are not capable of generating financial returns to enable debt repayment. And nearly half of China’s total debt is directly or indirectly related to the volatile real estate sector.  Is this a crisis waiting to happen?

As we know, real estate prices in China skyrocketed over the past decade.  Increasing by some measures 500%, from 2004 to 2013. Some analysts will describe China as the biggest bubble the world has ever seen. A price correction has already begun. In fact, a slump in the housing market seems to be accelerating, as housing prices have fallen in each of the past six months.

A McKinsey report argues. “A plausible concern is that the combination of an overextended property sector and unsustainable finances of local governments could result in a wave of loan defaults in China, damaging the regular banking system and potentially creating a wave for investors and companies that have put money into shadow banking vehicles”

Nobody knows if these are alarmist realities and/or how long it will take to result if at all, in a full blown crisis?  Premier Li also indicated a willingness to continue propping up the economy if necessary.  At this stage, the Chinese government probably has the financial wherewithal to deal with its debt challenges and stave off a full-blown financial crisis.

But as the case of Japan two decades earlier highlights, public finance can quickly get out of shape if the government does not promptly address financial avalanches. China must implement structural reforms to empower provincial governments to raise sufficient tax revenues to finance their expenditures and to enable the financial system to allocate finance more efficiently. Allot of China’s financial resources are currently being wasted. 

Some observers have argued that China could use its immense foreign exchange reserves (about $4 trillion) to solve its growing debt problem. But they tell us it’s not as simple as that.  Because such an approach would require selling foreign currency-denominated investments and converting the proceeds into renminbi.  This would push up the renminbi exchange rate, harming exports just at a time of economic weakness.

China must now pilot a major turning point in its growth trajectory.  A period of slower growth is being heralded as “the new normal”.  But what seems most imperative is unlocking productivity as a fresh driver of growth and industrial upgrading now that the demographic dividend of cheap labor has come to an end.  Here Thailand is in the same boat.  Two of Thailand’s key longer term concerns are that its stuck in the so called "middle income trap" along with a rapidly aging population. (Maybe my next article).

In the past as one report I read states: “China’s economic policy makers have proven themselves adept at navigating treacherous waters.  But introducing more market forces into China’s still state-dominated economy with all the creative destruction this entails, while at the same time finding a path out of the clutches of financial instability, will require yet more skillful policy making than in the past”.

Further, regional neighborhood disputes are rising. Contrast this to its domestic policy prowess, China has not been adept at making friends with its neighbors like Japan, the Philippines or Vietnam, or its own antipodes such as Xinjiang, Tibet, Hong Kong or Taiwan.  Even while it has made major inroads of late with Thailand through the large winning concession on building a massive North to South high-speed Thai railroad.

Many believe, the new AIIB could serve a very useful role in financing some much-needed infrastructure in SE and South Asia, thereby improving China’s soft power. But it will also be used to enable President Xi Jinping and his government to project their imperial image to their neighbors. So the West rightly fears, evenwhile its own imperial imposition is seen to be OK.  Sri Lanka just voted out a government which had sold its soul to Beijing.

These are the macro concerns of a rising power,  one reason Australia is taking a back seat and perhaps a reason why the SET as seen from the broader scale has taken in softening, at least until the economy shows improvement.  “Show me econ-Thailand”, are the new words to foreign investors.

 

Having said all this , today I want to add DCON (1.82) and again PYLON (8.50) to my recent list of new ideas as outlined in the just previous to this article.  Hence  AP, DCON, PLANB, PYLON and UNIQ, are my fresh stock ideas going into this Thai market correction and Thai New Year, April.  I expect combined these companies to report rising earnings even as the Thai economy continues to disappoint.  PYLON is a previous long prominent selection then sold on profit taking view,  but recently price corrected back to the "buy-me" view.

Paul A. Renaud.

Just now at the center -but not from- Hollywood, LA California.
www.thaistocks.com