Going into year 2015 we are at a key inflection point regarding the coming interest rate rise in Thailand -which may well lead on this.
Have stock markets started to discount an increase in interest rates both in Thailand as well as in the US (the EU will likely lag on that), or is it still many months off? Sooner or later % will increase and it will/may have an important impact on stock prices.
This will be a critical/key question going into 2015, as to how markets and the SET perform from here on. I will have more to say on all this and will here and in our forum post such reflections. As always we welcome your comments.
Realize, any change in interest rates is most often discounted many month before this happens, likely even 6-8 months before. It can have significant market effects on stock & bond market, real estate, currencies and even Gold.
One of the things the bears got consistently wrong this year as before is in their view that interest rates bottomed or will bottom shortly. In fact, they have not. Stock p/e's are more than most realize inversely related to interest rates. If rates have in fact bottomed the market will sense this well before and start lowering p/e valuations. But this must be balanced with then also the likelihood of economic activity picking up. P/e's will drop but earnings would then presumably go up, due to stronger GDP growth which is what higher interest rates signal.
Its one reason the market is not correcting much here as in the US: interest rates remain stubbornly low. The timing of this feared "imminent" increase in interest rates keeps being pushed forward. Not least due to continued anemic economic growth in the Western/developed world which goes along with ever low inflation rates. Price inflation has been low but not asset
inflation. Inflation does already exists as it is in asset prices, not consumer prices or labor prices. Stock and bond prices have been inflating like mad since the QE began. This is true but the reasons asset inflation is high is because such low(est) interest rates!
In developed countries, price & labor inflation is so low and this for so long, that many experts have recently feared de-flation the more of a worry then inflation. This in fact is what Japan has struggled around for over a decade. Recent drop in global oil prices is just further enhancing this.
Here is one of my key premises: one reason interest rates are and remain so low (along with inflation) is because of the ever higher automation of business in recent years. Robots, machines, computers with its ever more sophisticated software has at last had a tremendous effect on reducing the need for more expensive labor. Labor is increasingly being marginalized and so relative high unemployment persists which then mandates central banks to keep interest rates low. Its also a key reason for the increasing income inequality phenomena of recent, most notably in the US.
Some rightfully believe that Thai % may well turn upward first as there is no de-flation here and more importantly, the local economy is turning more buoyant going into next year. Not least, because the BOT (Bank of Thailand) is very concerned that millions of Thai savers are getting close to no return on their savings due to the persistent ultra low level of % rates. "Why save when your money in the bank returns near 0", in time this creates an over-spending culture here, as there are so little rewards holding money in saving accounts. Remember some 95% of Thai people do not invest in the SET and one reason is broker behavior. So here is and remains a huge Thai savings dis-intermediation problem, as economist like to call it. I much agree!
Alternatively, how many shop houses or condo's can one own? Many investor condo's are owned by Thai/expats which have savings/money, but which shy away from the SET for different reasons; mainly due to continued poor behavior of the brokers due to most just advocate trading vs. investment. Many condo's in Bangkok and tourist destinations remain far from being rented most of the time. Again, Thai savings are under-rewarded -and this is a real and ongoing reality and an economic drag for some years already.
If Thai % rates move up before the US next year, as I tend to believe, the Thai Baht may/should strengthen vs. say the US$. One key question will be how will the SET manage to hold up under a leading Thai % rate upward bias? On the one hand it should tame p/e valuations, on the other hand % increases will be fueled because of a stronger Thai economy and so likely higher earnings growth next year.
In the past when the SET sort of "peaked out" on rate increases, smaller cap stocks remained buoyant or even leading due to their higher earnings growth besides dividends. Its one reason I am not giving-up on my smaller cap bias; despite the recent closing gap of big vs. small cap p/e ratios.
I.e Thai smaller cap stocks for the most part are no longer trading at a discount to big cap's. A reality I for years here expressed was in the coming. Hence it will be increasingly important to pick winners on good earnings information going forward, rather then on just in-efficent small cap discount p/e pricing.
Just as I have here of late, by posting in our lounge about PPM which is rocketing up today and which must have never left the model portfolio, as I posted here in our lounge a few days ago. In fact, I see our member-lounge becoming increasingly important/valuable to post short value added insights by members here -along with myself!
Best Regards,
Paul Renaud.
www.thaistocks.com
