Are the big blue chip blues getting you down?

Big Blue chip stocks have been the laggards for years, now they are also the most volatile.

If the Thai SET sell off lately gave you some of the blues, I urge to instead take the long term view and reconsider some hard realities. Had you kept your hard earned savings, say in US blue chips stocks, you would be sitting on a miserable return today in a currency which has barely held its value, as compared to others including the Thai Baht.  While there is always volatility and set backs, I bet the long term superior returns to my advocated investment thesis will keep outperforming big "blue chip" global stocks. As it has so very rewardingly in the past many years.

Not many days ago many average global investors started to think USA’s 5-6 year market consolidation was about to end, as the Dow Jones was then flirting within 80 points of an all time high. As we now know, it was not meant to be, as since then the Dow has lost nearly 500 points -and so once again had to start over, yet one more time.

Just a few years ago, US blue chip stocks where labeled by the experts the most respected asset class in the world.  Yet, for years here I have expressed that this is just not so -year after year instead pounded on the table on Thai smaller cap shares. In fact I expressed here many times how and why. 

But let’s go back to the "blue chip blues of USA", to put things in perspective and look at the raw numbers?

--Procter and Gamble just a few months ago gave up on these blues and boosted its foreign holdings from 4% to 25%, just a few months ago.
--In May 2006, the 22 Billion Fidelity Blue chip growth fund made an unusual request: it will ask its shareholders for permission to own smaller cap stocks as well, so shying away from its own investment mandate.
---Business Week of April 17 2006 reports: "Just about everything is crushing US blue chip stocks: real estate, commodities, precious metals, international stocks and smaller cap US stocks".

The magazine goes on by stating "Welcome to the blue chip blues".
The S &P 100 stock index, the bluest of the clue chips, with some 6.5 trillion US$ in market cap, has returned just 2% annually to its investors during the past half decade!  If you exclude dividends, the returns come to less then 1%!  Showing us all again how dismal the big & often touted alternatives have been --along with their lousy dividend rates. Not just in the US but elsewhere in developed markets as well.

"The degree to which blue chips have fallen out of favor is remarkable. "When we buy a large cap we hear how can you buy that dog?" Its done nothing for years."   Quote by Business Week, on the big blue chip blues; which just had a long report on these for half a decade meager performers.

Foreign markets are increasingly just a mouse click away and more and more investors, private as well as institutional are catching on.  And while smaller cap stocks were once considered much riskier then large ones; the big company stock price, half decade malaise, showed that even the much touted and celebrated blue chips are risky. In fact from Microsoft to Nokia to large US drug companies, they have all been terrible performers for years.  And when the corporate scandals hit big US companies, they were seen in a different light. That light was "underperformance".

Contrast this to the long rally in emerging markets since the turn of the century, 6 years ago. For starters the Thai SET benchmark index doubled in valued during this same period and smaller Thai cap stocks, as demonstrated here for years, have done overall considerably better then that. Despite this, emerging markets companies overall still trade below their historical average based p/e’s and price cash flow ratio’s.  And the cash dividend yield of many secondary Thai shares remain as attractive as ever. Some approaching 10%.  Currently there is a rare opportunity to accumulate such bargains, which once again go begging.

Then there is the fall-out to a US stock exchange listing by large global companies.  The number of new large IPO listings have soared in other places around the world, notably in London -and all at the expense to a US listing. Consider: of the top 25 global IPO’s in 2005, only one was listed in the US. Back in year 2000, 9 out of 10, were listed on US soil.   The US,  from year 1996 to 2001, listed on average 50 non-US companies, in year 2005 it listed just 8.

It is not just only new IPO listings that are staying out of the US.  The NYSE (New York Stock Exchange) has seen a sharp drop in listing of big EU blue chips as well.  No wonder select US stock exchanges are holding talks about acquiring interests in foreign bourses. "If you can"t beat them, just buy them" as one observer noted.

The message remains clear to me:  large global shares have lost their blue chip status along with their performance ranking.  I for one am today super bullish at select Thai stocks, after their recent price correction in late May.

Best Regards,

Paul A. Renaud.
www.thaistocks.com