Thai stock market volatility.
On SET volatility and lacking industry practices.
Phuket Town had a huge SET Fair on Saturday February 14 2004 at the Royal Phuket City Hotel. It was very well attended with what I estimated be close to a thousand people.
Many young professionals where there, it was a sell-out by all counts. Thai language was the medium, I was the only foreigner present. The keynote speaker in the morning was Dr Nivaet Hemwachirawaragon (?) whom spoke well and articulate on value investing. Perhaps some of his ideas came from thaistocks.com? Perhaps like Thaistocks.com he has ample and long evidence that this type/style of investing has produced substantial capital gains and high dividends ever since the Asian crisis unfolded in 1997.
Later I was honored to be invited to a private lunch with some high officials from the SET and Khun Thmanoon Duangmanee which is an advisor to the Thai stock exchange, besides holds other prestigious positions in Thailand’s economic think circles.
I told Kun Punsak Vejanurug, an executive vice president at the SET 2 key points:
1) The exchange should have a more meaningful benchmark index. Just as one recent example, during the month of December 2003, this SET index moved up 19.2% yet during that same month the average of all stocks changed only up 1.72% -. In fact, there where more stocks that actually declined then went up, during that same period.
(To be precise, only 160 stocks went up, 27 remained unchanged and 254 actually went down in value, during this same 31 day period of December "03)
The "SET 50" index is similarly just another volatile large cap index and the "MAI index" has different listing standards and to small to be representative.
The SET benchmark index is highly influenced by a few volatile large cap stocks. Unlike in the developed countries, the large cap "blue chip" shares here are often the most volatile on the exchange. We are about to publish a study for our members which will prove that on average that the higher the market cap of a Thai stock, the more volatile that stock.
2) Thai Brokers should allow clients, even encourage them, to open two seperate accounts: one for trading and one for long term investing. Trading and investing should never be co-mingled. Khun Ponsak nodded his head. As is now, it is illegal to have two different accounts under the same name, at any Thai brokerage firm. It so forces unsuspecting investors, to mingle trading with investing. This practice is against all the chore rules to successful investing and trading.
What became clear from our discussions is that the Taksin government and the SET itself are very concerned at the extensive market volatility. Clearly this is something they would like and need to rectify, but I ask as I have for a long time: do they have the will power?
For many years the SET has been correctly labeled a volatile place to invest in. "I like some stocks on the SET but the volatility of the daily market prices is what I can"t live with", are regular comments. Thailand looses large and small institutional investor because at the end of each quarter certain stocks do not trade at all that day and so are valued at zero, or close down in market, value just that day, only due to excess volatility induced by the dominant day traders.
As just one recent example is ATC (67) the largest stock in the chemical sector. It traded as low as 52 during the last market correction. Had a fund been forced to price that stock, for valuation that day, a huge non-realized loss would have shown. And wrongly so, as this stock is right back to where it belongs in the high sixties. This oddity is difficult to explain to a fund’s board of directors whom only think how to avoid such positions in the future.
My own views on this grave shortcoming is as follows:
1) The Thai stock exchange is as in the past dominated by day traders and large hedge funds who buy and sell fast -and with no or little regard to fundamentals or dividend income. Dominantly watching daily stock graphs. These will acclaim that it is silly to ever buy a stock without seeing its graph. I believe it is even worse to ever buy a stock without even knowing what the company actually does to earn profits, or its relative valuation or dividend yield.
2) For the most part, the Thai broker community fuels and promotes excess day trading to the many new and old novice investors -many whom actually would rather invest then day trade. While they talk and play lip service to long term investing, Thai marketing officers routinely ask newcomers (as they asked me during the SET Fair in Phuket) "do you play the SET". I answer no, I invest in the SET! New investors whom indicate a serious intend to long term investing are over serviced by wrongly calling the client as soon as the stock is up a couple of spreads. There is a huge industry abuse here, which I have often reported on in the past. I used to think it would get better, but today I fear it may not.
3) The SET/SEC itself has some blame to take as while these institutions talk-up investing they have rarely -if ever: 1) force brokers to primarily promote long term investing, 2) know your clients rules and 3) proper following of investor suitability rules. Reporters should instead ask SET officials what concrete steps are they taking to rectify this abuse?
The problem that seasoned brokers ignore with day-traders is as follows, of course I am generalizing somewhat:
1) Day traders are not loyal patrons, despite good service they will often switch their trading account to the competition at the very first chance, or on any minor inducement. Also often forcing brokers to at times compromise on integrity.
2) They are prone to get the broker in trouble, sooner or later; by rapidly claiming a trade was mishandled or other complaints of questionable nature. (I am not talking here about clear broker faults in handling orders, which are the brokers fault and so responsibility).
3) In the US anyway, they are the first group to file complaints, sue by visiting eager lawyers and may even try to induce a broker into various questionable activity. If this gets challenged they just take their business elsewhere and brag about it.
4) They only look at short term stock graphs, hence the efficient allocation of capital is nearly non-existent. While they help with increased volume and so liquidity, they are overall a detriment to the whole notion of "efficient allocation of capital": the capitalistic systems very first assumption and raison d"etre. They mostly create stock market volatility which is increased risk.
5) They are very short term and rumor oriented and so the real reason why the local stock exchange is so volatile. Since the Thai SET is dominated by these type of "Johny short term investors", they fuel enormous volatility which promotes further panics to even less tempered longer term oriented investors. In finance volatility is risk! Further, spreading of rumors is illegal and not tolerated by responsible brokers and regulators alike. That is in developed stock markets, yet here day traders often use these tactics regularly.
Thai day trading brokers and clients are highly alarmist, as these want others to sell out so to "buy back lower". Further fueling volatility and often so loosing a good stock for that long term oriented client. Traders and trading can be desirable -and has its place: but on the SET they are over dominant and very pervasive and that is the real problem. They are the real and sole reason why the Thai stock exchange is and remains so volatile. The regulators and brokers alike have been lame in doing anything about it, for years.
Hence the SET’s reputation through high volatility is gravely compromised and so most national savings and large foreign funds remain out of the local stock exchange. The whole process of financial disintermediation is so heavily compromised.
Sadly so, the international investment community gets to see the exchange almost as sort of "Lady bar", good for a short thrill -but not the kind of girl one would stay with for any length of time. "The SET is great for a short term punt" sadly this is and remains the parloire among many institutional investors whom quietly shy away from all that volatility.
Let’s see if Mr. Taksin and the gnomes of the SET can once and for all rectify this huge shortcoming?? Is anybody pressing them on these issues?
Day traders and big institutional investors distort developing stock markets. Especially so if they are overly dominant, as they surely are in Thailand. Day traders and large investors cheer liquidity more then anything else. High liquidity are what make-up good stock graphs, -the bible of traders. Institutional mandates dictate that these only buy shares in very liquid counters. Broker want and nourish day traders -and institutions as these create more commission revenue, that is in the short run. Combine these nutty forces for years and you get real market distortions which the value investor can so cherry pick on. Traders and institutions beware: liquidity is never endlessly priced.
Long term private investors like you and me of course know this and so have handsomely profited over the years from all this market distortion nonsense. As stated many times before, one key result of these local entrenched practices is that it turns the SET into an inefficient market place, chuck-full of superb rational investment opportunities. Especially so during an environment of low domestic and global interest rates.
Those whom treasure high stock values along with high cash dividend income, regularly can pick-up bargains which go begging -and which get occasionally sold off or outright ignored, only due to excess trading and various broker nonsense. To identify these market irrationalities with specific examples, which we then visit in person and research for our members, has been our core objective since founding Thaistocks.com in 1997. Its been a profitable journey for many years as proven again and again here.
Best Regards,
Paul A. Renaud.
