Sunday, November 16, 2008

Thailand may lag Asian stock revival next year

Political risk still a big impediment


Despite signs that the global fire sale of all asset classes is slackening, as shown by foreign funds returning to the Thai stock market on some occasions, Thailand could lag the expected resurgence of Asian stocks next year if its political troubles drag on, says Theeranat Rujimethapass, head of private fund business at Tisco Asset Management.

Theeranat: ‘‘At the moment, one can’t depend on theories’’

Asian stocks, including those in Thailand, have started to rebound after central banks calmed investors by guaranteeing bank deposits and foreign debts. The US Federal Reserve has even helped financial institutions borrow.

"This improved liquidity and stopped the fire sale," said Mr Theeranat. But he said that fund managers had rushed to sell all assets to get cash to cope with redemptions or creditors recalling loans.

"Hedge funds are already leveraged - that is, borrowing money to invest. The problem concerns credit risk - no one trusting anybody anymore - so managers have to put funds aside in case creditors recall their loans," he said.

While this year's outlook is dismal - with prices of global equities, gold, hard and soft commodities all plunging and the entire year's earnings being wiped out in the fire sale - Mr Theeranat is optimistic about Asian stock markets next year.

In particular, he expects markets in China and India to do well because the two Asian giants are expected to post 8% GDP growth.

Thailand should benefit from a reflow of funds to Asia but political problems could weaken its rebound.

"Others may zoom ahead after rebounding but our economy could get stuck," he said. "It might not move any further because it could hit a cap and this cap is people's concern about the political risk."

Even so, he described Thai stocks as oversold, with a PE ratio of six times - making them cheaper than during the 1997 crisis - and dividend yield around 8-9%.

"Investors with a long-term view should not be disappointed if they buy Thai stocks today. The dividend yield is higher than what they would get if they bought government bonds. These are paying around 3% right now," he said.

Mr Theeranat, who handles mutual funds as well as private funds, added that Thai investors got caught off guard by the bourse's recent plunge by 200 points in under two weeks. Thai stocks had not been expected to sink so steeply because they had not risen as much as in neighbouring countries.

"Our neighbouring countries' stock markets climbed by 70-80% - so this type of correction is deserved - but the SET's plunge from 880 to around 600 and then 380 points was really overdone," he said.

Among other asset classes, Tisco Asset's senior executive expects bonds to post some - but not much - upside next year.

He also forecasts that commodities will rebound in 2009 after their prices fell by an average of 20% this year - compared with the 30-60% plunge in stocks - as sellers feared a global slowdown could hurt consumption.

It now seems that sellers oversold and prices should pick up in 2009. Yet this is likely to be most for soft commodities such as foodstuffs rather than oil or other hard commodities used in metals industries.

"Prices of soft commodities also did not rise as much as the hard variety recently," Mr Theeranat said.

He said that Thai investors had started to pay more attention to foreign investment funds (FIFs) after seeing the Thai stock market lag those of neighbouring countries for so long. Asian stock markets rose an average of 40% over the past four years, with China soaring by an average of 70-80%, while the Thai stock market inched up 7%.

"This led to people to think that investing in Thai stocks is not worth the risk, so they diversified and perhaps were lucky that the Bank of Thailand also opened the channel to investing overseas," he said.

Mr Theeranat added that this year's global financial turmoil had thrown a lot of well-entrenched theories out of the window. Despite economic problems being expected to weaken currencies, the US dollar has risen. In the event, the greenback strengthened because investors who joined the recent fire sale converted money into dollars, triggering a huge demand.

Another theory that collapsed this year was that a US slowdown would cause investment to flow to Asia. It turned out that the two halves of the world remained coupled.

"It's like a black hole that is pulling everyone in. Right now, it's quite useless trying to diversify. But that is not to say this goes against investment theories. It's just they aren't useful right now. At this moment, one can't depend on theories. It's about panic selling."

But he said most of Asia should escape financial problems as severe as those of the US and Europe. He said most countries have very little exposure to sub-prime and CDOs and Asian banks have tended to be more careful after the meltdown of 1997.

"You can see clearly in Thailand the loan to deposit ratio is not even one time. That is, banks have not released all the deposits they received as loans. They kept some back. Except for South Korea, where it is 120% of deposits, there are no major problems that would lead to financial institutions collapsing as in 1997."

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