Trust and integrity key to higher participation in the SET/MAI.

Trust plays a major part for differences in equity preferences of a culture.

Higher trust, even more then better investor education, is what is needed to reduce the high discount valuation Thai stocks have endured for long.

For the smooth and successful functioning of financial markets, investors’ trust in other individuals and especially in companies and brokers is of paramount importance.  Needless to say people will only invest in shares if they feel sure they are not being defrauded.  />Investing in stocks not only requires an assessment of the risk-return trade-off given the existing data/analysis, but also an act of trust that the data in our possession are reliable and that the overall system is fair.  />Which mostly means: cheaters are punished and their bad actions published in the press.  />How does Thailand fare on that?/>

While this seems obvious, almost trivial.. it helps understand important differences in different stock markets, around the world.  Meaning: their respective investor participation and so their different valuations assigned. Up until some years ago economist where unable to explain why for example some citizens/residents invest far more in stocks of a particular country, as compared to another.  />Why for example do people in USA and Sweden invest far more heavily in shares, then all other countries?/>

In the insightful book  “Economics 2.0”  />by Professor  />Norbert Harin  />and Olaf Storbeck (2009) provide us with the clear answers. (page 79)./>

In their broad study, the researchers demonstratively show that trust plays a major part for the differences in equity culture.  Consider that in USA only 7.2% of Americans and a mere 6% of Swedes say they do not trust major corporations at all.  />In Germany and Italy the corresponding figures are over 17% and these discrepancies are even more pronounced for highly affluent people.  />In Sweden only 2% of the rich doubt the integrity of business vs. Italy where the figure is 29%.  />No numbers are given for Thailand.  />No wonder then that in Sweden only 4% of the wealthy stay away from stocks while in Italy 35% do.  />/>

The Dutch central bank surveying over 2000 people. What they found is that people expressing the opinion that “most of those around them can be trusted”, are 50% more likely to own shares.  These same surveyed will so in fact also invest a larger portion of their wealth in shares, around 3.4% more, as this survey showed. While this sounds like a small number, its a huge relative amount considering its mostly based on a country’s pool of total private savings./>

While an increasing level of education will diminish the significance of the “trust effect”, it by far does not cancel-out the overriding dominant reality of the above conclusion.

The lack of trust, either generalized or personalized, reduces the demand for equities and so by definition their respective p/e valuations.  For a country’s capital markets, this is a huge price to endure as even a p/e  re-rating of a few notches would increase the total market value by many billions’ of Baht.  "In countries where the trust level is of lower levels, implies stocks will be more difficult to list and command lower valuations, which penalized the companies, the investors and the economy as a whole"./>

In year 2003, a book called “Credibility. How leaders gain and loose it, why people demand it” by Kouzes and Posner hit the shelves.  The authors here site survey after survey on what people/investors/citizens more then anything now want in leaders: its honesty.  />

Credibility/honesty is increasingly perceived the core foundation of leadership. This book shows beyond any doubt how “Honesty” is (by far) increasingly so more selected "as key attributes desired in leaders", beating out previous top ranking choices such as “forward looking”, “inspiring” and “competence”.  Where credibility is mostly about consistency between words and deeds./>

Credibility, competence and confidence are the content of good character and people/investors all over the world now demand this ever more; or they go elsewhere, as this book overwhelmingly demonstrates through hundreds of surveys.  This movement/belief has only increased by the populace in the past few years./>

Yet, regardless what the SET/MAI says, the single biggest reason why not more Thai’s and foreigners invest in good stocks here is due to their perceived issue on integrity, honesty and credibility by some companies.  Along with the regulators which seem to often aloof in attitude and inaction towards addressing these, with more then just words or idle warnings.   />