Capital is flowing back to Asia.

Few things in life are what they appear to be.

The month of August is perceived by investors around the world to be a high risks time. No doubt because we all remember a few serious shocks during this month of the year. But just like with traffic jams in France, never assume for sure what may only be possible.

Last year, on July 28th '98 , I made a clear statement at the Thaistocks.com subscribers lounge, that the US market would imminently fall. By pure luck, I hit it right on. August last year turned out to be mean USA correction time.

While I feel this could happen again soon I do not share the view that such a mini panic on Wall Street would have a devastating effect on all of Asia. For one, funds are shifting from North America back to Asia as the West catches the drift that economies are recovering here.

The recently lower US dollar value on global markets support this view. And if Europeans and others perceive the US dollar is loosing it's "punch", they will go to other "wells". And unlike last year, there are now other attractive "wells".

They are called the wealth re-generation economies which SE Asia is about to deliever on.

The strong undercurrent of the US stock market in recent times has been the continued inflow of equity funds from 'go with the flow', Europe and Japan.

As the Asian recovery moves forward, global investors will not much longer ignore the immense valuations differences between maturing US and re-emerging Asia. US fund managers who boast about US companies being "the best run in the world" etc.. will start requiring answering the long forgotten question: but does this mean they are worth 10-20 times more on the proverbial valuation table?

My perception is that the US market could have some mean sell off anytime, but unlike most think -it will not have much lasting effect on Thailand's or others in the region. In fact it will mark an important point where funds will shift here for better bargains and better positioning on the economic cycle which is starting here. In the medium term I see the Dow at lower levels all the while Asian markets move irregularly higher. Markets are anticipating and they see the Asian recovery continuing all the while the US stock market (but not the economy) capitulating.

Last Year the argument for staying in the US was: "why go dig another whole when this one is still coming up with gold". True during cavemen days as is true now. But this thinking no longer holds currently. The reason is that Asia is on the recovery path.

Higher US interest rates are often cited by the "bears", but I note that in Thailand the trend on rates is still lower. Just as the US 30 year Treasure Bond went above 6.2% last weeek, Bangkok Bank yet again reduced some key rates. By press time many 2nd quarter earnings (by the non-bank and non-finance stocks) have not yet been release but I expect continued spotty surprises on the upside. I note that the foot sector is a new industry which I have recently mentioned. UF (13.75) and PAF(9) are my top picks here and WFC(9) comes in third.

Hence, with the SET nearing 400 I view this an attractive entry point which we should take advantage of. I realize there is a chance of a 2YK mini-panic here or around the world or, a severe US market correction. Hence my only qualifier is that you either have at least a 6-18 month time horizon and/or that you protect your fully invested Thai stock positons by owning/trading some Put options on the OEX index in the US. As should the mighty Dow Jones topple we want to have a short positon which will soar so more Thai shares can be bought on any such possible, short lived, sell off.

I believe there is too much savings in the global financial system. The USA and Jaspane alone represents a staggering and ever growing amount. The biggest equity capitalization market in the world has had the biggest appreciation in value during the past 5 or even 10 years. Where are all those billions going to go and hide? Into low interst bank savings accounts? Or into Gold?

Speaking of Gold, older subscribers will recall that I have for some time quietly advocated accumulating some of the yellow metal. While reluctant to dwell on this here at thaistocks.com, I told more than a few who showed interest that AU ANGLOGOLD LTD ADS on the New York Stock Exchange is the best pure gold play. Not actually owning the metal but these shares. The stock is up to 26 US$ a clear break out on the charts. Evenwhile the metal sank to new lows. I think AU represents a leveraged play on gold's eventual price recovery.

*** Below is a discussion I had a few weeks ago with a subscriber who made some contructive comments. His remarks are shown between << and >>.

<< 1. The number of portfolios being tracked is confusing. First there are the stocks mentioned in the regular column. Then there are the Jewel select 30. Also, there are the preferred 15 of the Jewell 30. Finally, there are the preferred big caps.>>

First, the big cap. model was simply introduced on Jan 2 '99 to make a statement that thaistocks.com also favored some of these back then. I do not give much information here as Thai brokers have the best reports on this and so I can't add much value. Second, yes I give a smorgasbord of options! Because, as I have often stated it is "values galore" over here and there is something for all tastes. Obviously the ones that I have visited and written about are the ones I favor more as I have first hand quality information. I have tried to narrow down the list of "preferred's" by so stating the ones I most favor (among the smaller cap.s).

<< ...In a related concern, you talk about the value of mixing large caps and small caps, but where is that portfolio?>>

True, it is "the mix of the two which makes the pudding". I have always just thought that thaistocks.com niche and purpose is to show values and none of the big cap's qualify for this. Hence our professional answer is to abstain from showing this mix. Perhaps that's wrong?

<<...So, do you recommend purchasing a) the stocks mentioned in the columns? b) the Jewell 30? c) the preferred 15? d) the preferred large caps? Or e) some combination?>>

At Morgan Stanley in the late 80's the firm always published a weekly research publication where various analyst and the like gave their stock & market opinions. It was then up to the broker to then decide what he liked best for his or her clients. Can we be all things to all investors? Hold their hand, answer e-mails, review portfolios etc...all this for 325 bucks a year?

<<..As for the stocks that are added to (or dropped from) the recommended list in the middle of the quarter, it would be more fair to calculate as of the date that the recommendation was made instead of averaging for the whole quarter. Tyong is an example. The calculation requires a little more work, but not much.>>

True, ...it would then so reflect the true rate of return ...of the sum of average recommendations and this weighted by time. Do you know of a fix for this? Still, then someone could say the advocated stock moved up so quickly and so gave few a chance to own any (true, as some did). There is always more to be done.

<<..Finally, why not also show the performance of your selected portfolio relative to the S&P 500 or the EAFE? This would make it clear to readers that they may be missing out on opportunities if they do not participate in the Thai markets. Just some thoughts>>

Yes, very true and I sincerly thank you for them. Maybe my web page should be $495 a year and then I make all these improvements...but I think you used to tell me that I am already expensive. I THINK I have generally shown and proven again and again that in Thailand you want to focus on the smaller cap.s (in Japan this has already worked well). And for this it certainly is worth 325 US$ a year so to get some good investment ideas and be under "the Thaistocks.com umbrella" of getting a recommended Thai broker etc... and start implementing things. AS this is a process I also assist with. Should something go wrong (other then the stock price going down), I can also help by contacting the broker and complain as well. Or post a message in the subscribers lounge where by the way, some very good comments have been made. Not the least, are corrections other subscriber detected and alerts us all to. Like the last comment on GFPT which is a great example on how this helps all. How many more services can/should one provide?

Best Regards to all our Subscribers!

Paul A. Renaud. www.thaistocks.com

***

P.S.

To: The Nation Newspaper, Bangkok.

More on beating the volatile SET index.

Did you ever read Peter Lynch's book "One Up on Wall Street"? He is one of the most successful and best known fund managers in the US. His thesis is that individual investors can (and many do) consistently beat the "pros" in the stock market because they do not face the same heavy restrictions as regulated portfolio managers. Example: many portfolio managers are restricted to investing only in stocks that have a certain minimum market capitalisation or liquidity, as measured by average daily stock trading volumes.

Mr. Lynch would argue that it is this very reason that in Thailand real and unusual opportunities are available to individual stock investors - it is not that they are not excellent opportunities for funds - it is just that they surely do not meet the rigid requirements of a mutual fund investment committee. This institutional dilemma is especially and acutely so present, in emerging markets like Thailand.

This is the same theme in different words I have been writing on for over 2 years at my web page. What I did not know for a long time, is that the strongest voice in the fund industry says it so himself! Without a doubt, in emerging markets there are far better values to be found in companies with smaller market capitalisation and lower liquidity. As for sure, there's a lot more keen competition buying large cap./high liquidity situations. Probably far too much so.

Too many articles have been written on the advantages in owning funds as opposed to buying shares directly; I here will keep showing you the real and superior advantages - and how to implement this- in directly owning these Thai shares or, "diamonds in the rough" as I have been known to call them.

Another writer, Richard Thaler, a University of Chicago economist, has a little to say about this, as applied to business situations, in a chapter in his book correctly called: "Winner's Curse". He quotes several studies by psychologists and also a paper written by some individuals working for ARCO, the oil company, about Gulf of Mexico leases sales. When you have a lot of people bidding for an asset, the person who's going to buy it is going to be the most optimistic. And so he's or she likely to overpay. Obviously, when you have virtually no competition, as is the case with a few small-cap Asian stocks, you can buy more cheaply.

And...there is not much competition at all in buying the most undervalued stocks in Thailand!

The smaller and mid sized shares on the SET is one area in which an individual investor can find an edge as well as diversity - a place where small investors have a distinct advantage over large institutions! Many, many studies have shown that OVER TIME value stocks outperform growth stocks and many studies have shown that excess liquidity often drives "themes" to excessive, even ridiculous valuations that will eventually come back or crash back down.

Thaistocks.com on January 2 '99, published for it subscribers it's own list of "top 30 value shares". The average return of this smaller cap. portfolio as compared to the SET index during the same period showed the following results:

The nominal SET return of 44.7%, cannot simply be compared to the performance of our top "select value 30". Because the average beta coefficient is only 0.32 on this select portfolio. Meaning, these selected shares, as groups are far less volatile then the SET index. And volatility is risk in portfolio management! In fact the average beta (which is the measure of volatility), as showed by Tisco research is only 0.32 for these select 30 as compared to the SET for the period shown.