Thailand’s Stock Market on a sharp rebound.
Thailand's Stock Market on a sharp rebound.
First some macro economic reasons why the Thai market has exploded in the past few weeks.
In the 4th quarter of '98, Thailand may well be the best performing stock market in the world. The beginning of a stock price recovery has occurred while most global fund managers remain generalistically bearish. Non-performing bank loans have yet to peek and so bank and most other liquid shares are perceived as being ahead of themselves. This is the current intoxicating bear rhetoric. Still the Baht currency and SET index is currently climbing impressively. Why?
1) Sharpest fall in local interest rate ever seen in the Kingdom:Local interest rates on certificates of Bank deposits have fallen from over 12% 3-4 months ago to currently 7 to 8% and they are still dropping. Even the Bank passbook rate was reduced from 5 to 4.5%. The first such change in many years. While lending rates have been much slower to drop (for sure, always sticky on the downside) they too are now falling and should reach a single digit rate by early 1999.
2) Local inflation rates should follow much lower. The consumer price index inflation rate could drop in half to less than 5% over the next 12 months. I have some evidence that the actual CPI rate is currently well overstated in Thailand. The stronger local currency besides still falling consumer demand is the main reasons for the CPI to drift much lower in 1999. (Low commodity prices around the world helps). Will Thailand prime up the printing presses on circulating more money into the system? No, Thaistocks.com believes. The new Bank of Thailand governor seems too credible to allow this.
3) Reforms are taking hold. Still problems remain like getting money back into the real sector, and reforming bankruptcy and foreclosure laws. Yet, Foreign investment has started to flow back in the country.The IMF has praised Thailand for being the top reformer and adhering to the imposed "medicine" prescribed. Thailand is the IMF's new "Wunderkind". Meaningful reforms brought on by the deep crisis and a much improved and more solid government is to be credited for this.
4) The local economy is on a sharp turnaround.While the Thai economy is expected to grow only around 1% in 1999, this is nevertheless a major turn from this year's expected contraction of 8-9%. Changes at the margin of this magnitude are significant in economics as elsewhere.
In sum:Factors including the fall in interest rates, the strengthening Baht, easing inflation and a solid current-account surplus, all impressive.
Due to relative smaller market capitalisation the most interesting and lowest valued Thai companies remain off the "radar screens" of gigantic institutional investors. Yet precisely these are fast growing and profitable. Export oriented and with relative few foreign loans they are the "real bread and butter" of stocks listed Thailand. Out 454 listed Thai firms all but some 30, are completely ignored.
"Nature abhors a vacuum". In such an "investment vacuum". What is an institution to do?
| Consider allocating smaller capital sums for now to all of SE Asia. But establish a longer holding period by stated objective. In other words focus on value over liquidity. Liquidity is horribly overpriced in Thailand. Realize that the expected dividend stream on such a diversified portfolio could be immense over the next 3-4 year period. Smaller sums with a longer holding period. Accumulating not buying |
Institutions should still be cautious in allocating big sums to Thailand.Instead smaller capital amounts should be put to work. In accumulating over a longer period of time then used to. Focus only on fundamentally sound companies. In an economic system were local interest rates drop sharply, high dividend paying shares will have a strong "invisible hand" which will "chase" valuations higher and the premium paid for liquidity lower in time.
More reasons why the SET is now increasing fast.Overall domestic economic activity is still low and the Thai Baht currency is unexpectedly stronger. This will result in local inflation to be lower than the consensus now expects. This is the next surprise and the reason why I advocate highest dividend paying shares. This, versus the highly liquid but still lacking earnings, nifty -top 30-40 firms.
Thaistocks.com recommends:Buy value, buy dividend income stream, own earnings visibility and own what Thailand does best. Namely: Manufacturing, Tourism, Exports like added value food products or batteries and many others. Certain big capitalized shares are interesting but stay away from the debt bloated service sector namely; the previous expansionist and now recession plagued big bad bear caps. To insist on sticking to the old investment themes of "top down" country allocation with little regard to valuation and good fundamentals, means to get sucked into this investment vacuum. To miss much of the now recovering stock market over the next few years.
Nature as well as seasoned rational investors abhor an (investment) vacuum!
To fashionably write off Thailand as "too early" means to get sucked into an investment vacuum. It means to miss enormous opportunities currently at hand. Indeed opportunities very rarely seen in the wide world of risk vs. returns.
Let us show you many examples and our 3 separate model portfolios and despite our ever-broadening coverage of Thailand's most undervalued listed equity. The best values in the world.
Best Regards,
Paul A. Renaud
P.S.
For some good charts on Thailand's stock markets remember to look at: http://www.asiachart.com/thai.html
