Time to tame unruly markets a little

Time to tame unruly markets a little

The past week was nothing but a bloodbath on the Stock Exchange of Thailand, as investors lost millions and got burnt in ways not seen in more than a decade locally.

To put it in context, the SET Index in 10 trading days this month fell by about 10%, and on some days the dip was in excess of 5%. This kind of volatility was not seen even at the peak of the last global crisis of 2007-08.

A good long-term investor usually would take such an opportunity to collect some good-value bargains. But such a sharp decline in the market is like a falling knife: no matter when you try to catch it, you’re going to bleed. So the best option is to let the market settle and then make a move.

Foreign investors, who were net buyers of 76.39 billion baht in Thai equities during 2012, were net sellers of 32.6 billion baht in the first 10 turbulent days in June. So far this year they have sold more than 53.7 billion baht.

The outflow of funds has not been limited to equities. Funds are exiting Thai bonds as well, with total outflows this month from the capital markets close to $2 billion.

While nobody disagrees that the market was getting a little heated, the sudden correction has taken many by surprise, though in fairness the trend is universal in emerging markets and is mainly driven by confusion over what the Fed may or may not do.

The Thai baht, on the other hand, has been an issue of contention between the Bank of Thailand and the government for months. The baht was trading at a 16-year high of 28.55 to the US dollar on April 19 and 22 but later weakened to 31.10, though it rallied to 30.50 as of Friday.

The sudden strengthening of the baht earlier in the year had prompted an outcry by exporters, who were already worried about weak global economic conditions.

The 8.9% weakening of the baht in just over a month can be partly attributed to market intervention by the central bank but also to the outflow of foreign funds.

What’s worrisome is that movement in the Thai capital markets is often the most volatile in the region. The SET Index drop was steeper than elsewhere, even though it was not Asia’s best performing market over the past five months of this year. That crown went to Indonesia.

The baht’s movement has been equally volatile. The strongest gainer in Asia up until April, once the weakening process started, it weakened by 2.55 baht to the dollar in 35 days of trading.

Such head-spinning movements are not helpful for a developing country, and for a change I may have to say that the government may be correct in its call for a “stable” moment in the capital markets.

The job of any central bank is to try to control the excesses in the economy, manage inflation and all the issues related to monetary policy implementation.

Thailand’s central bank, it seems, has done a good job in carrying out many polices but has failed to some degree to control currency fluctuations and the inflow and outflow of funds by relatively fickle foreign investors.

As a proponent of free markets, I feel foreign investments are necessary for the development of any economy, but “hot money” is scary and failure to control this is something that can cost the country and the economy dearly.

There were times when politicians were shouting at Bank of Thailand Governor Prasarn Trairatvorakul for his reluctance to cut interest rates and control the influx of funds into the country. Dr Prasarn managed to weather that storm of criticism, for if he had moved too soon on rates, it could have invited more problems such as inflation, and possibly even a bigger bubble than the one we’re starting to see in the property market today.

The central bank has prepared a few measures to “control” the baht and since they were announced (not implemented, though, as policymakers will wait for an “appropriate” time), it seems the markets have gone into a spin.

Maybe it’s time for the Bank of Thailand to start to think a little more deeply and possibly look at measures that would control the volatility of the baht and the equity market.

After all, Thailand’s market today is driven far more by local retail and institutional investors than it used to be in the past. A few measures that could help stem the influx of hot money, as well as outflows that move faster than inflows, could be welcomed by local equity players and the investment community as a whole.

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