Saturday, March 9, 2013

Never before have Thai stocks rallied so much at a time when foreign investors were heading for the exit. The question is, how long can the rally last? The benchmark SET Index rose 4.6% last month even as international money managers sold a net $583 million (16.8 billion baht) worth of Thai shares, the biggest outflow among 10 Asian markets tracked by Bloomberg. The advance, propelled by 18 billion baht ($611 million) in net purchases by domestic investors, was the largest for any month when net overseas outflows exceeded US$500 million. The index fell an average of 5.5% during such periods since Bloomberg began compiling the data in 1999. "Local investors are prepared to step in and hunt for bargains," said Petcharat Powattanasatien, who helps oversee about $30 billion as the head of equity investment at Kasikorn Asset Management Co, the country's biggest fund manager. The longer-term sustainability of Thailand's rally is an issue, however, once the world economy starts to recover. Massive stimulus programmes by central banks have poured tens of billions of dollars into the system over the past two years or so. A lot of that money has moved into emerging markets such as Thailand's, where foreign investors can get better returns than in developed markets. If and when central banks start scaling back their stimulus programmes, a lot of money could leave more risky assets such as stocks for safer havens including bonds. For now, though, Thai citizens are driving local equity gains as the economy grows at the fastest pace since at least 1993 and local incomes climb. While Morgan Stanley is advising clients to cut stock holdings after valuations rose to record highs, Aberdeen Asset Management and ING Investment Management are still bullish. The SET index has recovered every time when foreign selling coincided with monthly losses since September 2008, rallying an average of 22% in the next 12 months, data compiled by Bloomberg show. "Thai stocks are still relatively quite attractive given the outlook for the economy and company earnings," said Adithep Vanabriksha, the head of equities for Thailand at Aberdeen, which oversees about $314 billion. The Aberdeen New Thai Investment Trust has jumped 35% this year, the top performer among 225 Thai stock funds tracked by Bloomberg. Mr Adithep favours shares tied to domestic demand, including Kasikornbank Plc, the country's fourth-largest listed lender by assets, and Siam Makro Plc, which sells food and consumer products to small shop owners. The SET index rose 0.4% on Friday to close at a 19-year high of 1,566.92, a gain of 1.8% from the end of the previous week. It is up 13% since the start of this year. By comparison, the MSCI Southeast Asia Index has advanced 4.7% in 2013, while the MSCI Emerging Markets Index has increased 0.8%. Outflows from Thai stocks last month compared with $1.2 billion worth of inflows into Indonesia and $146 million in the Philippines, according to data compiled by Bloomberg. The Jakarta Composite Index and the Philippine Stock Exchange Index both climbed 7.7% in February. Stock trading by local individual and institutional investors accounted for about 73% of total volume on the SET as of March 6, compared with 61% five years ago, exchange data compiled by Bloomberg show. Average daily turnover on the main SET board and the smaller Market for Alternative Investment surged 135% in January from a year earlier to about 58 billion baht, the bourse said in a Feb 20 statement. "This is a positive change as it helps to reduce volatility within the market," said Cindy Huang, a manager of the ING Thailand Fund, which returned about 26% this year. The SET index's 30-day volatility index was 12.2 on Friday, down from an average 20.2 during the past decade, according to data compiled by Bloomberg. That compares with readings of 9.8 for Indonesia's benchmark index and 13.8 for the Philippine stock market. Thai shares are expensive now that valuations have surged, according to Jonathan Garner, the Hong Kong-based chief of Asia and emerging-market strategist at Morgan Stanley. He advised cutting positions to below their weighting in benchmark indices in a Feb 27 report. The SET Index trades at 14 times analysts' estimated 12-month earnings, the highest level since Bloomberg began tracking the data in January 2006 and a 36% premium to the MSCI Emerging Markets Index. The SET's 82% advance from its Oct 4, 2011 low has exceeded the 77% average gain during bull markets since 1987, data compiled by Bloomberg show. Capital outflows and Thailand's widening current-account deficit spurred the government to float the baht on July 2, 1997, a move that helped spark the last major Asian financial crisis. Foreign investors withdrew about 30 billion baht, or $1 billion at current exchange rates, from Thai stocks in the 12 months ended June 1997, according to exchange data compiled by Bloomberg. The gauge slumped 60% in the period, versus a 16% drop in MSCI's Southeast Asia gauge. The Thai index is still 11% below its all-time high of 1,789.16 reached in January 1994. Thailand's economy and its financial markets have become more resilient to foreign withdrawals, according to ING's Ms Huang. The country's foreign-exchange reserves have grown more than 500% since the Asian crisis to about $179 billion as of Feb 22. The economy grew 6.4% in 2012, compared with the decade average of 4.2%. The expansion may slow to between 4.5% and 5.5% this year, according to government estimates. Rising incomes and tax incentives for long-term investment have spurred more Thais to put money in stocks, said Aberdeen's Mr Adithep. Per-capita GDP has increased to about $5,850 from $3,900 five years earlier, according to the International Monetary Fund. The government allows citizens to make tax-free investments of as much as 1 million baht a year into retirement and long-term equity funds. Shares offer better returns than gold and bank deposits at a time when surging real estate prices have made property investment unaffordable, said Neeranuch Pornkuakulsap, the 51-year-old owner of a garment factory in Bangkok, who has about 5 million baht of savings. Bullion has dropped about 5.5% this year. The average interest rate on three-month deposits at four major local banks is 1.61%, the lowest since July 2011, according to the Bank of Thailand. Resale prices of completed luxury condominium units in Bangkok jumped 15.6% in the third quarter of 2012 from a year earlier, according to the property services company CBRE. "Most of my friends are making a lot of money" in stocks, said Ms Neeranuch, whose equity holdings have gained about 10% this year. "I still think it will generate much better returns than putting money in the banks." The long-term prospects for Thailand's economy and stock market are both positive because infrastructure spending is increasing and the country is luring foreign direct investment, said Medha Samant, an investment director at Fidelity Worldwide Investment in Hong Kong. Prime Minister Yingluck Shinawatra's government has approved infrastructure spending plans totalling 4 trillion baht, much or it for high-speed trains and mass transit networks, over seven years. "The next catalyst will be when the government starts to disburse money regarding these projects," said Pong Ho Yin, a Hong-Kong based money manager at Allianz Global Investors. "That will provide more confidence to the foreigners." Earnings in the SET index will probably climb 28% in the next 12 months, versus 18% for MSCI's developing-nations gauge, according to projections compiled by Bloomberg. Many Thais "have had great success and spectacular returns by investing in companies with sound fundamentals such as strong earnings growth", said Sompong Cholkadeedamrongkul, a 60-year-old private investor in Bangkok. "There were several occasions that heavy selling by foreign investors gave me opportunities to buy shares of those companies at bargain prices."

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