STOCKS

Another lost year for Thailand's stock market

NUNTAWUN POLKUAMDEE

The year started optimistically for many stock investors, as analysts called for a bull run based on rising earnings growth and a revival in confidence following the December 2007 elections and the return of Thailand to democracy.

But Prime Minister Samak Sundaravej's honeymoon in office was short-lived. By mid-June, the streets of Bangkok were once more filled with street protesters clamouring for regime change, leading many observers to wonder whether the country was simply retracing the footsteps of the tumultuous summer of 2006.

Share prices have reacted accordingly. From a year-high of 884 points in mid-May, the Stock Exchange of Thailand index lost more than 100 points over the following month, led largely by a sharp selloff by foreign investors.

The macroeconomic environment has also turned decidedly bearish, as global oil prices rose to near $140 per barrel, putting pressure on consumers and companies alike.

Overall, it looks to be another lost year for the Thai market, with the index now down more than 10% since January. Yet compared to some other Asian markets, Thai shares have actually been a haven of calm, considering the massive declines in the Vietnamese and Shanghai markets.

Analysts argue that from a fundamental perspective, the Thai market remains attractive for investors. First-quarter listed profits for the exchange rose 33% year-on-year to 152.38 billion baht, while sales revenues gained 32% to 1.78 trillion.

Some 70% of the revenues and profits generated in the first quarter stemmed from the 20 largest companies in market capitalisation. The energy sector, led by the companies in the PTT Group, was responsible for one-third of total profits at 52.89 billion baht for the first quarter, followed by the information and communication technology group at 14.5 billion and property and construction at 12.5 billion.

Small-cap stocks posted more modest gains, with companies listed on the Market for Alternative Investment posting revenue growth of 10.44 billion baht, up 13% year-on-year for the first quarter. Profits rose 81% to 749 million baht.

The Samak government has been relatively generous to the capital market, approving in April a tax break for listed companies and increasing the personal tax deductions permitted for contributions to long-term equity (LTF) and retirement mutual funds (RMF).

Companies listed on the SET can qualify for a 25% corporate tax rate for the first 300 million baht in net income, down from the standard 30% rate, while firms on the Market for Alternative Investment receive a 20% rate, albeit with a 20-million-baht cap.

For fund investors, taxpayers can now claim deductions for contributions to LTFs and RMFs of up to 500,000 baht per year each, up from the previous cap of 300,000 baht.

Optimists also point to the low leverage ratios of Thai companies and the resiliency of firms to cope with cost increases as positive factors going forward. The market could turn swiftly upward, assuming that local political concerns ease and inflation moderates.

A sea of red is the norm rather than the exception at a time of receding foreign fund flows amid political turmoil.

Two clear beneficiaries however of the volatility of the markets in the first half were the Thailand Futures Exchange and the Agricultural Futures Exchange of Thailand.

The TFEX, the country's only derivatives exchange, saw daily turnover rise to an average of 6,363 contracts for the first five months, compared with 5,219 in 2007. Trade primarily remained focused on SET50 index futures, as investors remained relatively unfamiliar with the newer SET50 index options.

TFEX officials expect turnover to reach 10,000 contracts per day by the end of the year, aided by the planned launch of its third product, gold futures, in the third quarter. Contracts will be based on 10 baht-weight bars (151.6 grammes) of 96.5% purity, the standard for the local market.

On the AFET meanwhile, the sharp runup in oil and farm prices has helped spur new interest in rice and rubber contracts, both among speculators and traders seeking to hedge their positions from volatile spot prices. Turnover is projected to reach 1,000 contracts per day by the end of the year, up three to five times trade volume last year, once contracts for 100% jasmine rice are launched in August.

The bond market, meanwhile, saw yields spike on expectations that the Bank of Thailand would be forced to tighten monetary policy in the second half to cope with rising inflation.

Trading volume on the Thai Bond Market Association remained high in the first half at around 65 billion baht per day. The Bank of Thailand was far and away the largest issuer in the market, with 2.5 trillion baht of debt issued in the first four months, nearly double the 1.3 trillion floated the same period last year. The central bank issues, comprised of both short-term and long-term instruments, were floated to help manage market liquidity and sterilise capital inflows to help stabilise exchange rates.

Local banks were also active in the market, with analysts projecting up to 300 billion baht in new debentures this year as financial institutions sought to raise tier-two capital to help support loan growth.

The Finance Ministry is also expected to tap the bond markets heavily this year, with new issues projected at 300 billion baht to cover the budget deficit and raise funds for new investment, including that for the infrastructure megaprojects.

The ThaiBMA, meanwhile, underwent a key regulatory change as it upgraded to become a self-regulated organisation (SRO) to oversee and monitor market participants and trade.

While the Securities and Exchange Commission continues to hold ultimate responsibility for enforcement of market rules, the ThaiBMA will have the authority to levy fines or even withdraw trading privileges from market participants caught violating the rules.The ThaiBMA will be the first capital market organisation to participate in the SRO programme. Both the Association of Securities Companies, which represent local brokers, and the Association of Investment Management Companies, representing fund managers, are expected to upgrade to SROs within the next few years.

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ASSET MANAGEMENT

Korean debt lures fund investors

CHADAMAS CHINMANEEVONG

Korean fever dominated the mutual fund sector in 2008, as investors poured billions of baht into foreign investment funds focused on Korean sovereign debt.

As of May, 57 out of 158 foreign investment funds in the market were focused on Korean debt instruments.

The move comes as no surprise to Vana Bulbon, the chief executive officer of UOB Asset Management, considering that returns for Korean debt instruments typically averaged one full percentage point over Thai government bonds.

Average net returns for Korean bonds is 3% over three months and 4.5% for two years, compared with 2.7% to 2.8% for three-month Thai fixed-income instruments and 3.8% over two years.

Korean yields are also outpacing the 2.8% return for euro-convertible paper, the asset class that commanded attention from Thai investors in 2007. ECP yields have been gradually declining due to fund shifts after the US sub-prime mortgage crisis.

Overall however, the first half of 2008 was a tough period for fund managers. According to Lipper, a global fund information company, average returns for Thai funds across all asset classes was -0.16% for the first five months of 2008. But on a 12-month basis, returns have been better, with a 10.18% return on average.

Commodities have been far and away the best performer, with a 25.72% return for the first five months and a 57% return for the year to May.

Other asset classes have done less well, with equity funds down 1.67% for the first five months but up 19.92% over 12 months. Bond funds posted a 1.15% return for the first five months, on par with the 1.17% for money market funds.

Assets under management by the fund industry were 1.519 trillion baht as of June 2, down from 1.61 trillion at the end of 2007 due to market price declines.

Mr Vana said heavy competition for deposits by local banks and the launch of new government savings bond issues also added pressure on the fund industry.

He said interest rates were clearly on the uptrend, as the Bank of Thailand was expected to tighten monetary policy in the second half to help curb inflation.

Fund managers also saw an opportunity for growth with the launch of the limited deposit guarantee programme, which will cap state guarantees for bank deposits to one million baht per client per institution within five years.

Investors are likely to shift from bank accounts to the money market to take advantage of a better risk-reward mix in light of the limited deposit protection programme.

Mr Vana said the shift in deposits was a trend that would become clear over the next five years, with the major beneficiaries asset management companies with strong distribution ties with banks. "Personally, I think government bonds will be popular from now on," he said.

But investors should remain cautious in light of domestic and global volatility. Rising inflation and oil prices will depress economic growth in many countries, Thailand included.

Mitraporn Krairiksh, a fund manager at TMB Asset Management, said property funds are an attractive choice as a defensive play against inflation.

Inflows into property funds have picked up sharply after the central bank revoked its capital control restrictions for foreign investors, she said, noting that property funds typically averaged yields of 6% to 10% per year.

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ASSET MANAGEMENT

Legal reforms

NUNTAWUN POLKUAMDEE

Corporate governance in the Thai capital market is set to improve under a revised SEC Act that has called for significant changes in the role of market regulators and the importance of investor protection.

The Securities and Exchange Commission board will no longer be chaired by the finance minister, but will instead be a full-time appointment. SEC directors will also be required to have experience in capital market issues.

Overall, the changes are aimed at strengthening the political independence of the SEC and ensuring that board appointees are genuinely qualified to sit in a position to set capital market policy.

Vijit Supinit, a former governor of the Bank of Thailand and chairman of the Stock Exchange of Thailand, was named earlier this year as the first new SEC chairman under the amended law. The SEC board and a new secretary-general will also be completely revamped by the second half of 2008.

For listed companies, the new law increases the responsibilities firms, directors and executives have in complying with good corporate governance practices. Companies must now appoint a company secretary to be legally responsible for key documentation such as the minutes of shareholders' meetings.

The Stock Exchange of Thailand meanwhile announced in the first half of 2008 that it was considering demutualisation within the next few years to improve its competitiveness in the global financial markets.

Demutualisation would transform the SET's ownership structure from a quasi-public organisation to a public company.

The Boston Consulting Group was mandated to prepare a study of demutualisation options for the exchange, including issues on the distribution of shares and the roles and responsibilities of the SET.

The SET has indicated that programmes such as investor education and marketing initiatives should be turned over to a new Capital Market Development Fund responsible for financing and overseeing public service initiatives.

The first half also saw further progress in plans to facilitate cross-border investment. Six Asean countries - Thailand, Malaysia, Indonesia, the Philippines, Vietnam and Singapore - agreed to establish an Asian board, comprised of the largest stocks listed on each individual market.

Eventually, investors in each of the countries can buy and sell securities listed on a different market through the Asian board. SET officials expect details such as clearing and settlement to be finalised in 2009.